The Investment Management Association has rejected the claim that UK investors have miss-sold active funds due to an epidemic of index cloning.
Last week, wealth manager SCM Private, has asked regulators to investigate the scandalous index-cloning epidemic in which UK active managers charge high fees for simply following a benchmark such as the FTSE All-Share.
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SCM said its analysis found that investors might have saved around £3 billion in fees over the past five years if they had chosen low-cost passive funds over index clones.
Daniel Godfrey, chief executive of the IMA, said that SCM has presented no evidence of mis-selling or any breach of the Financial Conduct Authority’s principles.
"The SCM report is sensationalist, offering massive assertions as fact, particularly on mis-selling. It presents no evidence," Godfrey added.
SCM examined 127 funds within the IMA’s UK equity income and UK all companies sectors that had a five-year record and managed a minimum of £100 million, of which almost half (46%) were closet indexers, with 40% or more of their holdings matching the underlying index.
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By GlobalDataGodfrey told Financial Times that there could be a small number of funds that do little but hug the index and that the IMA would welcome any such examples being exposed.
"Investors should question managers and ask them to explain their strategy. An active manager could hold a neutral view on a large number of stocks in the portfolio. But if even the active part of the portfolio aims to only modestly outperform its benchmark, then it is not worth a full active fee," added Godfrey.
Godfrey said that UK equity funds already disclosed their holdings twice a year in their interim and annual shareholder reports. A move to quarterly reporting would not be transformational for transparency as claimed by SCM.
"I very much doubt that index cloning as described by SCM is a significant problem in the UK equity funds sector," added Godfrey.
