News 27 Apr. 2016

Marc Kramer and Agata Zdunek Quoted by Institutional Money on Active Share and Closet Indexing with Mutual Funds

Funds Partner Marc V. Kramer and Frankfurt office funds associate Agata Zdunek were quoted extensively by Institutional Money, a leading publication for institutional investors in the D-A-CH region (Germany-Austria-Switzerland), in an article titled “Hunt for Index Huggers” published very recently in edition 1/2016.

Active Share is a measure of the percentage of stock holdings in a fund manager's portfolio that differ from the fund’s benchmark index and can be useful in identifying so called "closet indexers" (“index huggers”), i.e. managers who claim to be active but whose portfolios are very similar to the benchmark portfolio. Identifying closet indexers is important because active management fees can be a significant hurdle to outperforming the index for anyone holding a portfolio similar to its benchmark.

With ESMA, the EU’s Securities and Markets Authority, steadily increasing its supervisory work on potential closet index tracking and German securities regulator BaFin even going beyond ESMA by recently launching special inspections with mutual fund managers in Germany, Mr Kramer describes possible legal consequences from detected closet indexing such as, inter alia, administrative fines by BaFin and prospectus liability towards investors.

Marc Kramer points out, “Regulators in the EU and in Germany have started to define Active Share and to determine criteria for identifying closet indexing with no indications available yet of what the outcome will be.” he notes that fund managers in Germany appear pretty aware by now and finally have put Active Share on top of their internal agendas. He further comments: “Interestingly, in Europe - primarily in the Nordic countries and in Poland but now also in Germany - closet indexing seems to be a bigger issue than in the United States”. According to Mrs Zdunek, any deviation from the investment program and strategy described in the prospectus of a mutual fund may make its manager vulnerable as to closet indexing.