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Closet indexing costs UK pension schemes 1.7 billion pounds a year
May 20, 2014 / 12:41 PM / 3 years ago

Closet indexing costs UK pension schemes 1.7 billion pounds a year

LONDON (Reuters) - UK pension schemes are losing out on 1.7 billion pounds of potential returns a year because of active fund managers failing to differentiate themselves from benchmarks, according to consultancy Aon Hewitt.

A man walks past the London Stock Exchange in the City of London October 11, 2013. REUTERS/Stefan Wermuth

Around 75 percent of the 460 billion pounds of UK pension fund assets invested in supposedly actively managed equity funds is allocated to “core active funds”, which “do little more than track their benchmark”, according to Aon Hewitt. This phenomenon is commonly referred to as closet indexing, or closet tracking.

If these assets could either lower their fees or maximise their returns through more active management, the consultancy reckons they could deliver an extra 1.7 billion pounds a year for pension schemes.

“Schemes committed to an active approach should steer clear of managers that charge a high fee for essentially matching an index,” said John Belgrove, senior partner at Aon Hewitt.

“To deliver performance in excess of the benchmark, schemes must be willing to take risk and follow a broad, unconstrained strategy using the very best ideas and with the highest conviction managers.”

Reporting By Jemima Kelly

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