On 19 July 2019, the Central Bank of Ireland (CBI) published a letter addressed to the Irish UCITS industry detailing the findings of its Thematic Review of Closet Indexing by UCITS Funds (the Review), along with an associated press release.
The objective of the Review was to gather evidence on cases where UCITS marketed as actively managed were in fact tracking the performance of an index without making the necessary disclosures to investors.
The analysis covered 2,550 UCITS funds authorised in Ireland categorised as being actively managed as of March 2018. Of that number, the CBI identified 182 UCITS it suspected of being "closet trackers”. It has made follow up investigations into 62 of these funds so far, with action taken against 57.
The CBI’s letter highlights the following conclusions from the Review:
- In some cases, the performance of multi-manager UCITS funds was frequently similar to a benchmark index, meaning the appropriateness and utility of active management fees were questionable.
- Disclosures to investors on a fund’s investment strategy in the Prospectus (the legal document forming part of the investment contract between an investor and the fund) and the KIID (a short document providing key information to investors in relation to the UCITS fund) were not always entirely comprehensive or accurate, potentially limiting an investor’s ability to make an informed decision on whether to invest in the fund.
- Boards of UCITS Fund Management Companies (Boards) had engaged in instances of poor governance and controls, including insufficient oversight of offering documents and investment strategy.
- Some funds had charged a fee for certain share classes that exceeded the fund’s performance target against a specified index. Consequently, even if the fund managed to outperform the index in question, the associated fees would absorb any profit that would accrue to the investor.
- In some instances, no comparator was included in the past performance section of the KIID. Investors were therefore unable to evaluate whether the fund in question had performed effectively against its benchmark.
The CBI has approached each of the funds where shortcomings were highlighted. UCITS which provided inadequate disclosure on their investment strategy will need to send updated documentation to investors. Updates to the Prospectus and KIID as a result of this should be submitted to the CBI by 31 March 2020.
Finally, the CBI notes that Boards, when assessing the investment managers annual presentation, should consider whether a fund has delivered on the stated objective and remains a suitable investment for investors.
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