ARE PM’S LOOKING FOR TURKEYS??? - DISMISSING ALLEGATIONS OF CLOSET INDEXING
On June 28, 2022, upon hearing the details of a class action against a large Canadian Asset Manager, the BC Supreme Court ruled in favour of the Asset Manager, dismissing the class’ claim for over C$1.3 billion in damages. The plaintiff’s central theory was that the portfolio manager of the Fund in question was not making active investment decisions and was instead simply attempting to track or replicate the Fund’s benchmark index (known as “closet indexing”), and executing a passive investment strategy, without reducing the fees accordingly. The Court rejected the class’ claims, finding that throughout the class period the fund was actively managed with the objective of outperforming the benchmark index.
IIAC has summarized the key elements of the case, in the form of a framework that sets out the factors that distinguish the use of benchmark data from closet indexing. This can be used as a tool for both Portfolio Managers and Compliance Officers in assessing portfolio trading activity.