Closet indexing class action rejected — again

By James Langton | February 28, 2024 | Last updated on February 28, 2024
2 min read
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A proposed class action against a fund manager and dealer over alleged closet indexing has, once again, been rejected by a court in British Columbia, which found that the proposed claim doesn’t set out a clear theory.

The Supreme Court of B.C. dismissed a third attempt to certify a class action lawsuit against fund manager HSBC Global Asset Management (Canada) Ltd. and fund dealer HSBC Investment Funds (Canada) Inc. alleging that investors paid fees for active management in certain funds yet the funds’ portfolios merely tracked a benchmark index, and, as a result, the funds underperformed after fees.

“[Investors] suffered significant loss as a result of the closet indexing strategy and the excess management fees,” the proposed plaintiffs alleged.

However, the court found that the purported claim based on the use of a closet indexing strategy “is not properly pleaded and is not capable of supporting the plaintiff’s application for certification.”

The court rejected the claim that there was a substantial link between the funds’ performance and the performance of their benchmark.

“The existence of the benchmark does not create a linkage. It does not affect or change the performance of the equity fund,” the court said.

“A linkage may exist where the portfolio manager buys, holds or disposes of securities, based on the benchmark’s composition. In doing so, intent would be required,” it said. Yet, this would amount to a claim of fraud, which is specifically disavowed in the plaintiff’s filings, the court said.

As a result, it found that the claim is “confounding and confusing” and cannot support a class action.

“In sum, the defendants are entitled to know the case they must meet, which the [plaintiffs’ latest claim] does not provide,” the court said, dismissing the application to have the case certified as a class action.

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James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.