Equity Funds Admit to Closet Indexing Breaches in Danish Review

Denmark’s financial supervisor says almost three dozen equity investment funds have come forward to say they fail to meet criteria designed to protect investors against so-called closet indexing.

The Financial Supervisory Authority has looked at the 2015 reports of 35 funds and is now in talks with them to determine whether the investments should be reclassified as passively, rather than actively, managed, according to the Copenhagen-based agency’s annual industry review.

Regulators, including the European Securities and Markets Authority, are cracking down on closet indexing, saying that funds that tie investments to benchmarks aren’t giving investors the returns and active management for which they pay. Norway’s consumer watchdog said in June that clients of the country’s largest bank, DNB ASA, paid more than $80 million more in fees than they should have and it’s seeking reparations in court.

The Danish Investment Fund Association last year recommended that members that don’t meet criteria aimed at preventing closet indexing explain their investment approach. A government-backed committee in December recommended limits on administrative fees.

Investors don’t appear to be benefiting from economies of scale that would be expected as investment volumes grow, the FSA said. Administrative costs have increased on average 14.5 percent annually since 2011 while total assets under management have increased 13 percent each year, according to the agency’s report.

Average returns fell by more than half last year, amid higher costs and losses on bond holdings triggered by low rates as well as low growth and inflation, the FSA said. Funds’ total assets climbed 8.1 percent last year to 805.6 billion kroner ($121 billion).

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