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The difficulty in addressing this problem relates to the identification of this type of funds. Indeed, a wide range of factors must be taken into account to assess whether a fund is being actively managed, including the fund’s objectives and the extent to which the stated investment policy allows to take risks, the research efforts to build the fund portfolio, the reference investment universe, the investment’s strategy and style, and the degree of freedom available in relation to a benchmark when a reference to a benchmark is made. All these considerations should be looked at in the context of the portfolio being assessed as well as its evolution over time. Consequently, it is too simplistic to rely on a few quantitative criteria to identify closet index funds.
The use of a pre-defined threshold for active share as a tool to identify potential closet index funds raises serious questions. It is indeed widely accepted that small-cap funds, funds with small AuM, and funds with a diversified benchmark are all more likely to have higher active share. It is therefore much easier for these funds to achieve a high active share than for large funds, large-cap funds or funds benchmarked for example to single-country markets in which a few companies represent a sizeable part of the index. Retaining a single threshold would therefore end up favouring some investment styles over others.
Despite the difficulty in identifying closet index funds, EFAMA agrees that a potential gap between the information provided by fund managers about the fund management service they provide and the service they in fact offer, does deserve due consideration. Indeed, fund managers should not give the impression that they are providing a more active fund management than they do in practice.
In EFAMA’s view, the current UCITS regulatory framework already provides a good basis to ensure that investors will receive appropriate information to achieve this objective. In this context, we would recommend that fund managers take particular care in making sure that they are fully compliant with those regulatory requirements and are ready to respond to enquiries from national supervisors in this respect.
EFAMA also recognizes that there may be a need to clarify the practical interpretation of some of the already existing legal requirements to foster legal clarity and avoid diverging interpretations, as rightly pointed out by ESMA in its Statement. We are currently looking into this matter and will be happy to share its conclusions with ESMA in due course and to support ESMA’s work in this respect.