EDITOR'S LETTERMerryn Somerset Webb
Outing closet tracker funds with smart beta
One of the most outrageous scams in the financial industry (and that’s saying something) is about to be challenged in court: 2,500 investors have signed up to a class action initiated by the Swedish Shareholders’ Association, claiming they were mis-sold funds.
The funds they bought were labelled “active”, suggesting that they would come with a high fee, but be run by clever people working hard to choose the best stocks and outperform a relevant index. Instead, they say, they got funds that, as the Financial Times puts it, “did little more than hug the index”.
We’ve written a great deal in MoneyWeek over the years about how angry “closet trackers” make us. Selling them to investors is clearly a nasty type of wealth thievery and it also plays its part in dragging down the reputation of the fund-management business as a whole. We look forward to seeing a similar class action in London.
In the meantime, I’m pleased to say that the industry is having a go at creating some better products. Last week came news of a fund that will charge only performance fees. The fees structure doesn’t quite work for me (see my blog on this), but if you don’t get paid unless your return deviates properly from the index, there is at least little chance of you turning your fund into a closet tracker.
That’s good. But another of the new offerings might be better. It is a ‘smart beta’ exchange-traded fund (ETF).
• Read the full editor’s letter here: Outing closet tracker funds with smart beta