On February 2, 2016, the European Securities and Markets Authority issued a statement, addressed to investors and fund managers, on some European collective investment funds that may potentially be “closet index tracking funds.” Closet indexing can occur when fund managers claim to manage portfolios actively, but in reality, the fund stays close to its benchmark index. Such practices can mislead investors as they may not receive the service or risk/return profile that they expect, whilst possibly paying higher fees than those usually charged for passive management. ESMA carried out research using a sample of around 2,600 funds between 2012 and 2014 and found that 5% to 15% of Undertakings for the Collective Investment of Transferable Securities equity funds could potentially be closet indexers. ESMA recommends that UCITS management companies re evaluate whether they provide accurate information to investors on the performance objectives of relevant funds so that investors can make informed investment decisions. ESMA has stated that it will take an active role in coordinating further analysis at national level and will assess whether any further steps are necessary to ensure that market participants wholly comply with disclosure obligations.

ESMA’s statement is available at: https://www.esma.europa.eu/sites/default/files/library/2016-165_public_statement_- _supervisory_work_on_potential_closet_index_tracking.pdf