Research by academics in Europe and the US have found that investors, including those in Canada, have been overcharged in at least twenty of the world’s largest investment markets and people are calling for regulators to act.
The study called ‘Indexing and Active Fund Management: International Evidence’ examined the relation between indexing and active management in the mutual fund industry worldwide and found evidence of systematic mis-selling.
In Sweden and Poland it found that more than half of the assets in domestic equity funds had been funnelled towards managers that charge high fees for active management but closely follow their index.
Known as ‘closet tracking,’ the mis-selling phenomenon means more than 40% of the assets in local equity funds are ‘benchmark huggers.’ In all of the countries looked at it was found that benchmarking funds with an active share of less than 60% was prevalent.
As a result of such mis-selling, academics of the study are calling for regulators to intervene in the fund industry and make sure investors are getting exactly what they pay for.
Recommendations have come shareholders to perhaps put a cap on fund fees and ban all the active funds that require more.
The US had the lowest proportion of closet trackers and while it seems to be a bigger problem in Europe, it also affects many Canadian investors.
The report is likely to strengthen calls for regulatory change beyond CRM2; specifically, a look at embedded commission.