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Turning up the heat on active managers

Funds which closely track their benchmark have become a no-go area for self-respecting fund selectors. Sweden, the original home of Niclas Hiller, now the chief investment officer at Norwegian wealth manager Formuesforvaltning, was the country where benchmark huggers first came under scrutiny last year when the Swedish Shareholders Association launched a lawsuit against Swedbank Robur for selling funds marketed as active which in practice closely followed their benchmark.

“40% of mutual funds in Sweden are closet trackers,” says Hiller. “It’s actually a big scandal.”   

In Switzerland, a country of similar size as Sweden, the situation is little different, says Joachim Klement, CIO of the local investment consultancy Wellershoff & Partners. “The vast majority of products have a very low tracking error. These are the kind of guys who do one or two bets every year and then do nothing,” says an outraged Klement.

 

Away from the murky middle

So no surprise he is trying to push his clients out of what he calls ‘the murky middle’. He finds a much better proposition in passive funds. “You can get passive and factor exposure extremely cheaply,” he says. When it comes to active funds, they should really live up to that. “I want a high tracking error, a high active share and a fund that can go anywhere,” says Klement. “If I pay a management fee 1.5%, I want to see a tracking error of 4 or 5, otherwise that alpha will never end up in my portfolio.”

Andrew Summers, head of collectives and fund selection at Invest Wealth & Investment, believes Klement’s opinion is representative for the wider fund selector community. “There are lots of inflows into high active share funds and passive funds, and no inflows or net outflows from not very active funds,” he notes.

Part of the Bonhill Group.