closet indexing

Closet Index Fund

A mutual fund that is actively managed in theory, but more or less tracks a benchmark stock index. Closet index funds generally exist because their managers believe it is safer to generally track indices rather than take on the greater risks incumbent with more active management. Closet index funds do not advertise themselves as such, but one may determine whether a mutual fund is one by comparing its R square to a given index. Some advisors counsel staying away from closet index funds as they carry fees and commissions associated with mutual funds, and one can directly invest in an index for less expense, while achieving the same result.

closet indexing

An investment method in which an individual develops a widely diversified portfolio of securities that achieves a performance level nearly identical to that of a broad-based market average yet claims the performance is the result of active management based on market expertise.
References in periodicals archive ?
The Central Bank of Ireland has published the outcome of a review of UCITS funds on the subject of closet indexing. The review is the largest data driven thematic review of the funds industry to date.
Closet indexing was the real bubble that is currently popping.
A system that encourages closet indexing while delivering negative value to investors is clearly broken.
Of course, this leads to a phenomenon known as closet indexing. Many active fund managers don't really do much to be different than a passive index benchmark.
If you own some mutual funds, they may be less diversified than you think, not likely to outperform their benchmark indexes and overcharging you -- thanks to closet indexing.
Some pros even take risk avoidance to an extreme by intentionally managing their portfolios in line with the stockmarket indices--a practice known as "closet indexing." These portfolios never underperform their benchmarks by much, but on the other hand it's tough for them to beat the market by much.
The most active stock pickers tend to create value for investors while factor bets and closet indexing tend to destroy value.
These funds of course look for absolute return, and moreover are not locked in to "closet indexing" investment styles.
To answer this question, we will look at the total costs of equity funds as well as the implications of another little understood obstacle, closet indexing. In the end, CPAs are likely to share the view that whether or not the markets are efficient is irrelevant.
Closet indexing is a practice whereby asset managers claim to manage their funds in an active manner whilst in fact staying very close to a benchmark and charging management fees in line with actively managed funds.
large cap equities, the most competitive area of the stock market and the segment in which "closet indexing" is most common.
In addition, 43% of advisors said they used passive investments because many active managers were really "closet indexing."