Outing the closet index funds

The only difference between an expensive actively managed fund and an index tracker could be what you pay for it. Paul Amery explains.

If you own a Volkswagen you probably know you can buy a similar car under the Skoda logo for less say, 10% for an equivalent with both running on the same engine. But you might still stick with the old brand. Now imagine that the VW was not 10%, but 1,000% more expensive. Surely anyone in their right mind would choose the Skoda?

Yet, according to new research from fund manager SCM Private, many of us ignore a huge cost gap when choosing active funds over indexed equivalents, even though there's little difference between them. SCM reports that nearly half of the average actively managed UK equity fund is closet indexed. In other words, many fund managers largely replicate their benchmark index, while charging investors an arm and a leg for a service they could get far more cheaply elsewhere.

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Paul Amery

Paul is a multi-award-winning journalist, currently an editor at New Money Review. He has contributed an array of money titles such as MoneyWeek, Financial Times, Financial News, The Times, Investment and Thomson Reuters. Paul is certified in investment management by CFA UK and he can speak more than five languages including English, French, Russian and Ukrainian. On MoneyWeek, Paul writes about funds such as ETFs and the stock market.