On 18 July 2019, The Central Bank of Ireland (the "Central Bank") published a press release and an industry letter (the "Letter") arising from its thematic review of UCITS funds on the subject of closet indexing, on the Central Bank website.

Background

In December 2018, the Central Bank confirmed that it was analysing over 2,000 Irish domiciled UCITS which claim to be actively managed, to ensure investors are not disadvantaged by "funds operating in a manner that is not consistent with the way in which they have presented their objectives, policies and charges". The analysis involved an assessment of "closet indexing" where the investment policy (I) indicates that the fund operates an active strategy, while the fund's performance in reality adheres closely to a benchmark and therefore implements an investment strategy which requires less input from the investment manager and/or (II) charges management fees in line with those of funds that are considered to be actively managed.

This is the largest data driven thematic review of the funds industry to date. Detailed analysis was carried out on all of the 2,550 Irish authorised UCITS funds classified as actively managed as at March 2018 against a suite of over 2,500 indices using analytical parameters of Tracking Error Volatility, R-squared and Beta, in order to identify those UCITS funds that appeared to be closely moving in line with an index.

 

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