The flow of assets to passive products over the last several years has increased the pressure on active mutual funds. Analysts are predicting an industry consolidation with the prime target being those funds that track an index but charge relatively high active management fees – the so-called closet-index funds. Here are the 10 largest such U.S. large-cap equity funds.
The data for this analysis was provided by Morningstar. The criteria I used to identify those funds were the following:
- The fund was classified by Morningstar as a U.S. large-cap fund (value, growth or core) and had at least five years of performance history.
- The fund was not classified by Morningstar as an index fund.
- The oldest share class for the fund was selected.
- The five-year average tracking error to the fund’s Morningstar Category Index was less than 1.5%, which means it was in the bottom 5% of tracking errors for large-cap funds.
- The five-year average expense ratio was more than 0.75%, which is above the average expense ratio of all U.S. equity funds (0.70%).
There is no conventional definition of a closet-index fund and these criteria are arbitrary.
This methodology is superior to another way of identifying closet-index funds, which is to use “active share.” Active share measures the extent to which a fund’s holdings (typically published on a quarterly basis) deviate from that of its stated benchmark. But that approach ignores changes to the fund during the quarter, which could cause a fund’s performance to track an index other than the fund’s stated benchmark.
The first four funds in the table (from AXA) do not have ticker symbols. The prospectuses for those funds note that shares are sold only to insurance company separate accounts, qualified plans and other investors eligible under applicable federal tax regulations.
All the fund companies in the table below were contacted prior to the publication of this article. No requests for corrections were received.
Being a closet-index fund is not a guarantee of poor performance. Indeed, this list should not be considered as a recommendation to avoid any of these funds – any more than a list of the highest tracking errors would be a considered a recommendation to buy a fund.
This list should serve as a starting point for further analysis, beginning with a look at the performance of the fund relative to its benchmark over this five-year period and over longer periods, so as to encompass a full market cycle.
The 10 Largest U.S. Large-Cap Closet-Index Funds
|
Name
|
Ticker
|
Fund Size ($ millions)
|
Morningstar Category Index
|
Tracking Error Morningstar Category Index 2011-12-01 to 2016-11-30
|
Average Net Expense Ratio
|
|
AXA 500 Managed Volatility IB
|
|
7,880
|
Russell 1000 TR USD
|
0.684
|
0.860
|
|
AXA Large Cap Value Managed Volatil IB
|
|
5,193
|
Russell 1000 Value TR USD
|
0.791
|
0.876
|
|
AXA Large Cap Growth Managed Vol IB
|
|
4,621
|
Russell 1000 Growth TR USD
|
1.150
|
0.888
|
|
AXA Large Cap Core Managed Volatil IB
|
|
2,568
|
Russell 1000 TR USD
|
0.733
|
0.920
|
|
Principal Large Cap Value III Inst
|
PLVIX
|
1,855
|
Russell 1000 Value TR USD
|
1.370
|
0.774
|
|
Eaton Vance Tx-Mgd Growth 1.1 A
|
ETTGX
|
1,393
|
Russell 1000 TR USD
|
1.453
|
0.840
|
|
SA US Core Market
|
SAMKX
|
711
|
Russell 1000 TR USD
|
0.725
|
1.000
|
|
Eaton Vance Tx-Mgd Growth 1.2 I
|
EITGX
|
649
|
Russell 1000 TR USD
|
1.456
|
0.758
|
|
Principal Large Cap Growth II Inst
|
PPIIX
|
529
|
Russell 1000 Growth TR USD
|
1.333
|
0.878
|
|
Putnam Research A
|
PNRAX
|
270
|
Russell 1000 TR USD
|
1.435
|
1.182
|
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