Investors can have a hard time identifying "closet indexing"--when an actively managed fund actually is built around an index--but new measures might be useful to predict fund performance.
Antti Petajisto and Martijn Cremers, two
For example, if General Electric and Exxon Mobil each account for 4% of an index and a fund had a portfolio exactly mirroring the index except it had 8% in GE and nothing in Exxon, its active shares would be 4%. The more a portfolio differs from an index, the higher the active share percentage.
Additionally, the study found that the average fund using the Standard & Poor's 500 Index as a benchmark has an average active-share percentage of 66%. Basically, the average large-company stock fund had a portfolio that was 66% different than the benchmark and the rest essentially mirrored the index.
The study also revealed an increase in funds that could be depicted as closet indexing during the 1990s, a period of major growth in the mutual-fund industry. The study looked at data from 1980 through the end of 2003 and closet index funds contained about 30% of all assets in 2003, up from practically no assets in the 1980s.
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