A spokesperson for JPMorgan Asset Management (JPMAM) explains the JPM UK Equity Core fund is “explicitly a low active risk fund with a total expense ratio of 40 basis points in the C-share class and is designed to have a low tracking error”.
She adds: “The fund’s low tracking error forms the foundation of a tightly controlled risk framework that the investment team actively overlays with JPMAM’s behavioural finance process. The goal is to deliver alpha, net of fees, on a consistent and risk controlled basis. The track record demonstrates that it has been highly successful at achieving this objective.”
Research into closet trackers has grown more popular, with Morningstar recently releasing a study of the active share of European large-cap funds between 2005 and 2015 that shows 20.2 per cent are so-called ‘closet indexers’ with an active share of less than 60 per cent. But it notes the proportion of closet indexers has been falling in recent years.
So what is behind this decline?
Tom Poulter, investment research analyst at Square Mile Consulting, suggests there could be a number of reasons. One possible factor could be differences in the timing of the pricing of indices and passive funds – intraday or end of day – that can create considerable differentiation in tracking errors, which could affect the cut-off point for identifying closet trackers.
| Closet trackers: Definitions |
R-squared: A statistical measure that represents the percentage of a fund’s movements that are related to a benchmark index. In theory, the more actively managed the fund, the lower the R-squared. Index trackers carry an R-squared value of 95-100 per cent. Tracking error: The typical tracking error of an index tracker should be 0 per cent, but depending on the method of tracking it can be slightly higher, as any changes to the index need to be reflected in the fund by buying and selling appropriate stocks. Active share: This measures the share of a portfolio’s holdings that differs from the holdings in the benchmark. An active share of 100 per cent implies zero overlap with the benchmark. |
Another possible driver is the volatility in sectors, such as resources, that has caused managers to avoid these areas and therefore increase their active share.
Mr Poulter notes: “Within the UK a lot of the managers have avoided the oil and gas sector, [and] as it makes up roughly 12 per cent of the index [that can be quite an active move]. In global emerging markets a lot of people have been avoiding Brazil because of the political problems.”
He adds the correlation between sectors in 2015 was a lot higher than in this year – “if you remove oil and gas it is a bigger call this year”.
Ben Willis, investment manager and head of research at Whitechurch Securities, says that avoiding certain areas can affect the level of beta.
