Outing the index-hugger funds

'Closet tracking' has been labelled one of the most scandalous cons in the funds industry. But cracking down on it is proving difficult, says Rebecca Byrne.

It's been labelled one of the most scandalous cons in the financial industry. But cracking down on "closet tracking" is proving difficult, as investors in Sweden are now discovering. Back in December, thousands of shareholders took action against Swedbank Robur, one of Scandinavia's largest mutual fund managers, alleging it had mis-sold funds to retail investors. Essentially, they argued the firm was charging excessive fees for active management on two of its funds, when in reality the funds were passively tracking their benchmarks.

Funds that "hug the index" while claiming to be trying to beat the market have been criticised by consumer groups across Europe, and the Swedish case was seen as a test case for legal action against the industry. However, the claim, which sought SKr7bn (£530m) in compensation for investors, has now been dismissed on a technicality: the National Board for Consumer Disputes said that judging it would require hearing oral evidence, which is not eligible at the board.Carl Rosen, chief executive of the Swedish Shareholders' Association, told the FT that the decision was influenced by big banks who were lobbying to have the case thrown out. He says he plans to appeal this "very disturbing" decision.

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