On 18 July 2019, the Central Bank of Ireland (the "Central
Bank") issued a press release and a
letter to industry
(the "Industry Letter") on its thematic review of closet
indexing by UCITS. However, some of the key supervisory issues
identified by the Central Bank are relevant for all UCITS boards
and managers ("Boards").
Background
Closet indexing or closet tracking, also known as "index
hugging", refers to portfolios which are described as being
actively managed, when in reality the fund stays close to or tracks
a benchmark.
In 2016, the European Securities and Markets Authority
("ESMA") raised concerns that closet tracking may
prejudice investors as they are not receiving the service or
risk/return profile they expect based on the fund's disclosure
documents while potentially paying higher fees compared to those
typically charged for passive management.
