Masters in Business
At the Money: Avoid Closet Indexing
Apr 17, 2024
Andrew Slimmon, Managing Director at Morgan Stanley, discusses the dangers of closet indexing in mutual funds. They explore the risks of not deviating from benchmark indexes and how transparency and active share impact performance. The conversation touches on the benefits of low-cost passive vs. concentrated active investing strategies.
16:39
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Quick takeaways
- Closet indexing blurs active and passive fund distinctions, leading to underperformance and high fees.
- Balancing active share and tracking error is crucial for outperformance while avoiding unwanted risks.
Deep dives
Impact of Closet Indexing on Active Investing
Closet indexing poses a significant challenge to active investing strategies by blurring the lines between active and passive funds. Managers charging active fees while closely mirroring indexes fail to generate enough differentiation to justify the fees, leading to underperformance over time. Bill Miller's critique highlights how closet indexing tarnishes the reputation of the mutual fund industry, pushing investors towards more cost-effective indexing or truly active management.
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