American Century Investments has been hit with a closet indexing charge, details an article in Barron’s. The San Francisco-based law firm Schubert Jonckheer & Kolbe has filed a class action suit against the mutual fund, with claims that ACI’s American Century Value fund charged high fees for what is considered active management, when it was in fact closely mirroring its benchmark. The charge shines a light on the challenge that active managers have as they try to compete with index funds while still staying sufficiently diversified in their holdings.
While American Century refutes the charge as totally without merit, closet indexing has been an issue for years, ever since investors shifted their assets into less expensive, passive index funds that frequently out-earn active managers. Those managers, feeling the pressure to compete, kept their portfolios close to their benchmarks in return. The problem is that those managers charge outsized fees, which decreases their investors’ net returns, the article continues.
For investors looking to avoid closet indexers, analysts advise checking a fund’s active share score, which can show how widely a portfolio diverges from its benchmark. In a range from 0 to 100, funds that score more than 60 can be considered active. According to Morningstar, the article contends, the American Century Value fund scored 69 in comparison with the Russell 1000 Value Index.