Is your fund a ‘closet tracker’?

One of the fund industry’s dirty secrets is that large numbers of actively managed funds aren’t doing what they claim. Instead of trying to beat the market, their managers quietly set out to make sure their returns will never be too far away from their benchmark index.

Yes, they’d like to do a bit better if they can, but their top priority is to ensure that they don’t lag too far behind.

From the perspective of the fund companies and their managers, this 'closet indexing' or 'benchmark hugging' is entirely understandable. Investors are likely to pull money out of funds [...]

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