Closet Indexing

An attempt, usually by fund managers, to mimic the returns of a benchmark index without holding the exact components of the index.

Since exact mimicking of a benchmark index would be considered an index fund(and investors wouldn’t be happy at paying extra to have their money managed), a closet indexing fund manager hopes to charge more while attaining returns similar to a benchmark index which their performance is compared to.

According to “Stock Market Wizards” closet indexing was widely practised in the 1990s at the mutual funds with the largest amount of assets.  This led to the holdings of the largest mutual funds being quite similar, each holding large amounts of stocks with largest capitalization.

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