First of its kind?
https://www.marketwatch.com/articles/american-century-investments-lawsuit-51636672247?mod=mw_latestnewsSuit is against American Century Funds and directed to TWVLX. "American Century told Barron’s in an email that the allegations are “false and completely without merit” and that it will vigorously defend itself against the lawsuit."
In the Large Cap thread I posted about PRBLX and how I admire its performance but I have a hard time switching from FXAIX or SPY to it because the performance is so similar. Am not implying that it's a closet indexer as I've done ZERO research on the subject on this fund but when I read the story above about closet indexing (something I wasn't familiar with) ... it made me think of my recent post. I'll have to take a closer look at several examples.
Wonder how many other funds too closely mirror their benchmark index?
Corrected… American Century… not American.
Comments
The article conflates active share and correlation. The former was defined in a 2006 working paper by Martijn Cremers and Antti Petajisto as a measure of how much overlap (or lack thereof) the actual components of a fund have with the components of an index. More formally:
Active Share = ½∑ | weight portfolio (sub i) - weight benchmark (sub i) |
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/leadership-series_active-share.pdf
FWIW, ActiveShare.info reports TWVLX has an active share of 65%. Not great, but better than 31% of large cap funds. By this measure, almost a third of funds would be at risk of being sued.
OTOH, correlation is a measure of how closely a fund's movements resemble (or can be "explained by") an index's movements.
The way the suit is described (" plaintiff’s attorneys cited a metric that suggests more than 90% of the fund’s movements can be explained by the benchmark"), it sounds like, not surprisingly, the complaint is concerned with the fund's performance, not how closely its holdings match those of the index.
Morningstar reports that the 3 year R² of TWVLX and the R1K value index is 96.84%. Perhaps there's an argument to be made. The problem is that just because a portfolio moves like an index doesn't mean that the portfolio is being managed for that effect. TWVLX is significantly more volatile. Its three year standard deviation is 10% above that of the index. That's reflected in magnified upside/downside capture ratios of 103/110. Likewise, its beta relative to the R1K value index is 1.09.
For a fund with underwhelming performance, that higher level of volatility is not something especially desirable. Nevertheless, it shows that this unleveraged fund is not a mere index tracker.
I don't care if an active fund tracks an index on the upside, but I do care if it tracks an index on the downside. The SPY lost like 38% in the GFC while PRBLX was down only 22. I'll take positioning & performance like that anyday.
"Downside protection has been a strength for this
fund’s focused, roughly 40-stock portfolio. Since
Ahlsten became a manager on the fund, the strategy
has outperformed the S&P 500 in every market
correction, including the 2007-08 financial crisis, 2018’s
end-of-year pullback, and early 2020’s pandemic-driven
sell-off. One reason for that is that almost all holdings
have narrow or wide Morningstar Economic Moat
Ratings. While the fund typically lags in the ensuing
rallies, the managers have shown skill in picking up
depressed names that have proved beneficial in the
rebound."