Thematic Review of Closet Indexing

18 July 2019 Press Release

Central Bank of Ireland

  • Letter to industry highlights key supervisory issues identified in Review of Closet Indexing
  • Cases of poor governance and controls by Boards of UCITS Fund Management Companies identified
  • Boards of UCITS Fund Management Companies to actively consider findings and review and revise their prospectus and KIIDs where necessary

The Central Bank of Ireland has today (18 July 2019) 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. Detailed analysis was carried out on all of the 2,550 Irish authorised UCITS funds classified as actively managed as at March 2018.

This review has highlighted broader issues around the effectiveness of investor disclosure and the legitimate expectations of investors in respect of the service provided by fund managers.

Key findings of the review include:

  1. Investors were not always given sufficient or accurate information about the fund’s investment strategy in the Prospectus and KIID that affects their ability to make an informed decision on whether to invest in the fund.
  2. Instances of poor governance and controls by Boards.
  3. Instances where the fund had a target outperformance against an index that is less than the fee charged to certain share classes in the fund. The result is that even if the UCITS provides a return at the upper end of its projections, investors in these share classes will not realise a positive return against the benchmark, as the fee charged will cancel out any outperformance achieved.
  4. In some cases, in the past performance section of the KIID no comparator was included so that investors in these funds were not able to determine whether the fund, irrespective of performance, represented good value relative to its benchmark.

Commenting on the review, Director General Derville Rowland said:

“This represents our largest data driven review of the funds industry to date and we will follow through with each individual fund where we had findings.

“Investors in UCITS have a right to rely on the information in the Prospectus and the KIID and funds have an ongoing duty to ensure that this information is accurate and that the fund is managed in investors’ best interests.

“As well as following up with the funds where we had findings, we are requiring all UCITS funds to consider the accuracy of their Prospectus and KIID on an ongoing basis in light of these findings. Where such funds need to amend their Prospectus or KIID on foot of this exercise, we are giving them until 31 March 2020 to do so.”

The Board of each UCITS should actively consider the contents and findings in the letter to industry as they carry out their role, and review and revise their Prospectus and KIID where necessary. Furthermore, when accessing the annual performance of a UCITS the Board should assess if they have delivered on the stated objective and remain a viable and suitable investment for investors.


Derville Rowland, Director General Financial Conduct, is member of both the management board and the board of supervisors of the European Securities and Markets Authority (ESMA).

ESMA has described closet indexing as a practice whereby asset managers claim, according to their fund rules and investor information documentation, to manage their funds in an active manner while the funds are, in fact, staying very close to a benchmark and therefore implementing an investment strategy which requires less input from the investment manager [and] charge management fees in line with those of funds that are considered to be actively managed.