Guidelines to help identify potential falsely active equity funds


  1. Before you decide on a specific fund product read all the information that is officially available such as the 2-page Key Investor Information Document (KIID), the prospectus, (although this can be a very long document written in legal verbiage rather than in layman’s terms, hence the KIID is preferable) and all information on the fund issuer’s website.
  2. Have a close look at the investment policy (here you can find information about the fund’s benchmark), the objective of the fund (indicates whether the fund is marketed as passively or actively managed) and the size of the fund. Experience shows that larger funds have a higher chance of “surviving” in the long run.
  3. The fund documentation should clearly indicate whether it is an “active” or “passive” (index-tracking) fund.
  4. In order to estimate the success of a fund, it should indicate a benchmark as reference parameter. Be careful if the fund product does not include any benchmark in its documentation.
  5. If the active fund you want to invest in refers to any benchmark in its documentation, check whether the past performance of the fund (minimum 5 years, preferably 10 years) shows that the fund has over-performed this benchmark at least once or even several times.
  6. Compare the performance in the past with a comparable fund or even an ETF to find out how well the fund performed in the past. Be aware that past performance is not a guarantee for future performance but it can indicate whether the fund has a track record of being better than its benchmark.
  7. Be aware that the absolute performance of a fund does not provide a clear indication of the success of this fund compared to its peer group or to inflation. Therefore check the relative and the absolute performance of the fund.
  8. Compare the fees of an active fund – especially the management fee – with those of comparable funds. Higher fees in general require a higher performance, especially over the long-term in order to obtain the same results as funds with lower fees.
  9. Compare the evolution of the inflation rate to the performance of the fund over the last 5 to 10 years to find out what the real return of the fund looks like.
  10. Check whether the fund offered is a so called “UCITS fund” which has higher standards of transparency than other funds and need a “European passport” for their distribution.


There are some concepts that are important for the investor to know in order to better understand the “closet indexing” issue:

  • KIID: the Key Investor Information Document is a 2-page document that provides the key facts and figures of a fund. It will, for example, contain information on the fund’s investment strategy, the investment risks, the charges applied as well as past performance (both of the fund itself and its benchmark index). It can be seen as summary of the Prospectus and it is mandatory under EU Law since 2010 for all UCITS funds (except for structured funds). Better Finance recommends you to read the KIID carefully before investing.
  • Prospectus: This is the ‘fact book’ of a fund, where all the information concerning a fund is detailed. The Prospectus tends to be a very long document (+/- 100 pages) written in such a complex manner that it is very difficult for anybody without financial knowledge to understand the information provided.
  • UCITS fund: Undertakings for the Collective Investment of Transferable Securities (UCITS) are basically investment funds regulated by the EU. UCITS funds are mutual funds that can be registered in Europe and sold to investors worldwide using unified regulatory and investor protection requirements. UCITS fund providers who meet the standards are exempt from national regulation in individual European countries.
  • As mentioned above, a Closet Index Fund is a fund which is advertised as actively managed whereas in reality the managers follow a strategy that closely mimics a benchmark (typically an equity market index that measures the performance of a given equity market, like that of a country or a regional one).
  • The Active Share represents the proportion of stock holdings in a fund’s composition that is different from the composition of its benchmark, that is, the difference between the fund composition and its index. The greater the difference between the asset composition of the fund and its benchmark, the greater the active share. A fund with an active share of 100% has no common holdings with the benchmark at the time the active share is calculated, whereas a fund with an active share of 0% is identical to the benchmark.
  • The Tracking Error is the divergence between the returns of the fund and the returns of its benchmark, that is, the returns based on the fund and that are different from the ones given by the index. It is computed as the standard deviation between the return an investor receives and that of its benchmark.
  • The R-squared is a statistical measure that represents the percentage of a fund’s movements that can be explained by movements of its benchmark, that is, the measure that shows how much of a fund’s behaviour can be understood from its benchmark’s movements. In layman’s terms, it represents the extent to which a fund is similar to its benchmark.
  • An indexed Exchanged-Traded Fund (ETF) is a fund that tracks an index, a commodity, bonds, or a basket of assets like an ordinary index fund. Unlike those however, an ETF trades like a common stock on a stock exchange.
  • “Active” investment funds (called “mutual” funds in the US) are actively managed by an individual manager, co-managers, or a team of managers, who try to outperform their benchmark when they have one, or otherwise aim at generating “absolute” performance (a performance with no indicator of reference). The fees that are charged are usually much larger than the ones in index (also called “passive”) funds as they require more analysis and work.
  • An index fund is a fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500) in the US. An index fund has typically low operating expenses and a low portfolio turnover. They aim at replicating the market index they track, not at out-performing it.
  • ESMA, the European Securities and Markets Authority, is an independent EU authority whose purpose is to improve investor protection and promote stable, orderly financial markets. It has 3 objectives: investor protection, orderly markets and financial stability. It strives to ensure that financial consumers’ needs are better served and to strengthen their rights as investors. ESMA promotes the integrity, transparency, efficiency and proper functioning of financial markets as well as strengthen the financial system so it can withstand shocks and encourage economic growth.


WARNING: this can be used only for the UCITS equity funds sampled according to ESMA criteria, and the metrics provided take only the period 2010-2014 (5 years) into account. You may consider asking your provider to update these metrics for you. See our disclaimer above.

In order to identify whether your fund could potentially be considered a falsely active one (according to the ESMA methodology) you need to follow the next steps:

  1. On click on Fund Filter in the top menu.
  2. Fill in your e-mail address when asked to do so. You will then receive a confirmation email in your inbox with a link that will unlock the Fund Filter and take you back to the website
  3. Filter the database as you see fit or introduce the ISIN code of your fund (which is mentioned in the fund’s 2-page Key Investor Information Document or KIID) in the search box
  4. Alternatively, use the “Categories” tab in the top menu and click on the list you would like to check. You will also need to enter your email address for these databases
  5. Check in which category your fund appears (see below)
  6. Contact your provider, your National Competent Authority or ESMA for further information in case information regarding your fund is not available or if your fund could be considered to be potentially falsely active.


The information that will be shown about your fund will be the following:

  • The fund name is obviously the name given to the fund by its manager.
  • The base currency is the currency that is used by the fund (Euro, US dollar, etc.).
  • The ISIN refers to the unique identification number of the fund.
  • The domicile is the country where the fund is registered.
  • The Primary Prospectus Benchmark refers to the primary benchmark as stated in a fund’s prospectus according to Morningstar.
  • The management fee starting is the percentage of charges that the consumer pays every year.
  • The fund size is the amount of money invested in that fund (measured in EUR).
  • The Active Share is the proportion of portfolio holdings that differ from those in the benchmark index.
  • The Tracking error is a measure of volatility of excess returns relative to a benchmark.
  • And the R-Squared refers to the percentage of a portfolio’s movements that can be explained by movements in its benchmark.

As shown in the website, there are four categories of funds:

  • 6% (147 funds) do not report any benchmark in their prospectuses, according to Morningstar. This makes it impossible to determine whether a fund could potentially be falsely active or not. Our recommendation in this case is to look at the performance of the fund over the last 10 years – which you can find in its KIID – and check whether it is at least protecting you against inflation (consumer price evolution) over the same past 10 years. If not, it means that you have lost money in real terms (meaning the purchasing power of your savings has gone down). In that case you should ask explanations from your provider. If those are not provided or unsatisfactory you should consider allocating your savings to another product.
  • 50% (1,172 funds) do not provide enough information for Morningstar to compute the metrics selected by ESMA. It is also impossible with the available information to determine whether the fund could potentially be a closet index fund or not. In this case, Better Finance recommends asking your provider for the necessary metrics (Active Share, Tracking Error, R-Squared and any other relevant information) at least over the last five years. Then check whether the fund falls into one of the last two categories below. If the fund falls into the last category – potential closet index fund – look at page 2 of its KIID and check whether it has been “hugging” its benchmark over the last 10 years, by how much, and whether it has over- or under-performed its benchmark. If it has under-performed, you should consider allocating your savings to another product. If the KIID does not show the 10-year performance alongside that of the fund, flag it to your National Investor Association (please click here to see the list of Better Finance’s member organisations) and to your National Competent Authority.
  • 36% (848 funds) are sufficiently transparent and do seem to be truly active: active share above 60% and tracking error above 4% over the five year period (2010-2014). That is, the fund is potentially not a falsely active one so the charges and fees can be justified by the “active” management of the fund’s assets. The annual fees are between 0.75% and 3% in the ESMA study. Then check the fund according to our check list (Section A above).
  • 7% (166 funds) are sufficiently transparent and they are potentially closet index funds according to ESMA. This means that the funds included in this category are potentially funds that claim to be actively managed whereas in reality the managers could merely be “hugging” their benchmark index which they are supposed to try to beat. The charges and fees would then be higher than they should be. In this case, Better Finance recommends for you or your provider to look at page 2 of the fund’s KIID and check whether it has been “hugging” its benchmark over the last 10 years, by how much, and whether it has over- or under-performed its benchmark. If it has under-performed, you should consider allocating your savings to another product. If the KIID does not show the 10-year performance alongside that of the fund, we recommend contacting the provider to ask for explanations. If they are not provided or not satisfactory, the fund investor should contact his or her National Investor Association (please click here to see the list of Better Finance’s member organisations) and directly contact the National Competent Authority to alert the European Authorities regarding this issue.

Disclaimer:The study carried out by Better Finance is only replicating the European Regulator’s (ESMA) 2015 study, using the same sources and referencing the same period: from 2010 to 2014 only. It is a one shot study limited in time. Data results generated from ESMA’s methodology and filtering criteria therefore may very well have changed since then. This website and study does not contain a complete list of equity funds sold in the EU but only the “UCITS” Equity Funds selected following ESMA’s criteria.

Better Finance has not identified any closet index fund. It has only recreated and published the list of funds that ESMA sampled earlier, including those ESMA identified itself as “potential equity closet indexing funds”, based on its sampling criteria and on its quantitative analysis; we refer to ESMA’s press release and statement from 02/02/2016. Better Finance’s quantitative study therefore bears the same limitations as the ESMA one.