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Equity funds are available in different variants. One is index funds; they just overshadow a certain index and the performance becomes the same as the index. One can also speak of passively managed funds.
Another is actively managed funds, where the manager’s ability to put savings in the right stocks is crucial. Actively managed funds are more expensive than index funds.
And then there is hidden index funds. These are funds that are sold as actively managed, but are in fact very close to index funds, both in terms of return and investment.
It is these funds that Frida Bratt, a savings economist at Nordnet, wants to warn.
– There is nothing wrong with index funds, on the contrary. But you shouldn’t pay more for something you don’t get, he says.
She has reviewed 240 actively managed Swedish funds, each with at least $ 1 billion in assets under management.
Since then, Bratt has relied on the ESMA of the European Securities and Exchange Commission, key figures that in English are called “tracking error.” It is a measure that indicates how much a fund’s performance differs from the index against which it is measured. The lower the number, the less the index fund’s performance will deviate.
At the turn of the year, he squeezed the law and fund companies must now indicate their tracking error in funds, or their active risk, as Finansinspektionen (FI) prefers to call it.
ESMA considers a tracking error of four to be a warning to savers and three or less (while selling as an actively managed fund) to be an indication that the fund may be a hidden index fund.
– Then you should go ahead as a saver and examine whether the fund’s investments are very similar to the index, says Bratt.
This later This is called the “active stock,” or the portion of the fund’s security holdings that is actively invested and that is not identical to the index. If the participation is 100 percent, it means that there is no similarity between the fund’s investments and the index.
If, on the other hand, it is below 50 percent, this means that most of the fund’s investments are identical to the index.
– It will be practically impossible to beat the index, says Frida Bratt.
Of the funds reviewed found 25 that have a tracking error (active risk) of four or less. These funds manage over SEK 250 billion and the total fee is SEK 2.3 billion.
If this money had been invested in index funds where the average fee is 0.3 percent, the total fee would have been 750 million SEK. Therefore, these savers may have paid almost 1.5 billion more in commissions.
Frida Bratt thinks this is wrong.
– It is not reasonable to let savers pay for something they do not get. They charge as if the fund is actively managed, he says.
Although about ESMA suggests a limit to what a hidden index fund can be, FI has chosen not to have one.
– The important thing is that the information is correct, says Catrin Hådén, deputy director of Construction Supervision at FI.
She believes that the focus of the new legislation is precisely information, which must be clear and correct and which must help savers.
Catrin Håden, FI.
Photo: Finansinspektionen
– We must make a global evaluation; it is not the case that we only analyze active risk. We can see this in relation to what the background says to do, explains Hådén.
– If the fund says it is a passive fund, a fund close to the index, and it has low active risk and low commission, that is fine. But if you say it’s an active managed fund and charge for it, but then it turns out that you have low active risk, that’s when we can look further, continue.
So can there be a question of penalties?
– Yes, in the long run it can be, answers Hådén.
What penalties?
– We have to take that when we get there. We have just received a new legal requirement and have just started the review so it is too early to tell.
Would you say that hidden index funds are a problem?
– We don’t know the scope. Personally, I think we will find some, but I think the industry has improved a bit because this has attracted attention both in Sweden and on a European level.
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