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Rekenthaler Report

In Defense of Closet Indexers

They are no worse (or better) than other forms of active management.

The Unloved
Last week, the Financial Times whacked closet-index funds--actively managed funds that hold portfolios that look suspiciously like stock indexes. The FT’s article was sparked by an academic paper titled, "Indexing and Active Fund Management: International Evidence," which examined global fund markets. The paper found that closet-index funds were "prevalent" in all major fund markets.

The FT headlined that observation as representing a “gigantic mis-selling phenomenon.” A London Business school professor stated that closet indexing “is the active fund management’s dirty little secret. In some countries, where investors are more trusting and less questioning, the secret is well kept.” The chief executive of the Swedish Shareholders Association went further, calling on regulators to ban closet index funds that have annual expense ratios of more than 0.8%.