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Closet trackers
Supposedly active fund managers often place a large chunk of the money they are managing in a few large caps, in effect ensuring that their fund’s performance can not deviate too far from the market. Brokers often do, or encourage clients, to do the same.
The reason is supposedly the control of risk, however it is interesting that what is being controlled is not the volatility of the portfolio (i.e. the risk of losing money) but the risk of under performing the market. There are plenty of ways of managing volatility directly so why choose to do it indirectly, and possibly less effectively, by tracking the market?
Money managers tend to be judged by how well they perform relative to the market. Fund managers in particular tend to be ranked by their relative performance to other fund managers, which in effect means relative to the market. The beneficial side effect of tracking the market is that by reducing the chance of under performance money managers reduce the chance of losing clients – or their jobs!
The other side effect, for clients, is not as good. Clients pay a premium over what the manager of a tracker fund would charge on the value of their whole portfolio, but the manager only actively manages a part of it – in effect making the premium for active management far higher. Investors could get the same cheaper by splitting their money between a tracker fund and a genuinely actively managed fund. Its worth considering doing this and looking at fund’s holdings for signs of closet tracking before investing in them.
Comments(2)
Quite agree, don’t waste your money on buying mediocre funds, “look below the bonnet” at performance. people and process! For the first one look for consistency, for the latter two, less is often more!
Nice picture of you on the beach Graeme!
JB
Agreed, even if your comment is …ah… less then completely disinterested. I take it you do no closet tracking?
How did you find the site, James?
The photo is of Roshika, I did not think we looked that much alike even at that distance!
Sorry, comments are closed
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