In our last blog post on the topic of closet tracking we commented on an 08 May 2019 Norwegian Court of Appeal ruling allowing 180,000 investors to recover excessive fees (£30.4m) charged for an actively managed fund, because the product delivered was tracking its benchmark more closely than investors were entitled to expect. We have now had the opportunity to review an unofficial translation of the Court of Appeal’s judgment. A couple of points are particularly noteworthy.
At its heart, the case is not about a tracker fund masquerading as an active fund and charging a higher fee. Over time, the fund had outperformed its benchmark. Rather, the case was about whether, on average and over time, the manager had, in the implementation of its investment judgement, demonstrated a sufficiently active approach to justify its fee relative to the investor information provided.
The conclusion was that while the manager’s investment idea generation may have proved on average pretty good (an average hit rate of 51.4%, meaning the manager was right more often than it was wrong), those ideas had been implemented with too muted conviction given what investors had been led to understand the approach would be and the fee charged. There was evidence before the court that if, based on the same idea generation, the manager had doubled its bets, excess returns would have been far greater. Of course a manager making bigger, but worse, bets would have underperformed significantly, but escaped the criticisms in this case.
On the logic of the judgment, had the same fee been charged but the investment approach been described in a way that reflected management in practice, then the scope for intervention on fees would not have existed. To that extent the case is arguably primarily a case about transparency and the consistency of what is articulated to investors vs. reality. To the reader the investor information that appears to have contributed most to the manager’s fate (subject to potential appeal) was its stated objective of “achieving the ’highest possible relative return’’.
These themes, and other aspects of the judgment are explored more fully in our in depth article.
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