The emperor has no clothes

Last week, Dagens Industri exposed the truth about the Swedish fund industry. The newspaper's investigation into hidden index funds revealed funds that call themselves active but, in practice, barely differ from an index.

Some fund companies were called to account for an active share below 45 percent. One company chose not to respond at all, stating that the metric can be inflated. We read through the report without much concern. We choose companies to invest in based on whether we have a margin of safety relative to our intrinsic value, not on the size of their index weighting. However, since we calculate these metrics ourselves, we might as well share them.

Amos Value, the Swedish equity fund, has an active share of 90.9 percent and an active risk (tracking error) of 7.2 percent as of September 23. Both are well above the thresholds Dagens Industri states are required for a fund to be called active, i.e., an active share of over 50 to 60 percent and an active risk of over 3 percent. For comparison, the funds highlighted in the investigation had an active share of between 35 and 44 percent.

Larger funds face a real challenge here. As assets under management grow, it becomes difficult to take meaningful positions in smaller companies without affecting the price, which naturally draws them towards the index. The amount of active risk various funds take is included in the mandatory reports that all funds disclose but is often deeply buried. Furthermore, reporting the active share is entirely voluntary. Are you paying for active management? Feel free to check what the active share is and how large the fund's tracking error is, if you can find it.

We cannot promise returns above the index, or any returns at all. Past performance is no guarantee of future results; the value can both rise and fall, and you may get back less than you invested. But we promise that we invest actively in our Swedish equity fund, and we intend to prove it. See our twelve largest holdings here