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Editor's note: the following story was originally published on Dec. 14.

Like the millions of Americans who will soon be trekking to gyms to work off holiday weight gain, the managers of the funds on the accompanying list should make New Year's resolutions to become more active. There's some compelling evidence that they've taken a relatively passive approach to running their respective portfolios.

Passively managed index funds have long been important components of the investment mix. But these now-ubiquitous offerings tend to compensate for their middle-of-the-road returns with razor-thin expense ratios. The index-fund group's raison d'etre has been that expensive research isn't necessary to match the

S&P 500


Active fund managers, by comparison, invest more time and money researching stocks in the hopes of beating their benchmark index, and they charge commensurately higher fees.

It's not unusual for pilots of nominally actively managed funds to be accused of playing it safe by sticking close to the market's return. This strategy doesn't necessarily earn the managers eight-digit bonuses, but generating mediocre performance and settling for a mere seven-figure bonus beats standing in the unemployment line when an active investment strategy doesn't pan out.

The issue for investors in so-called "closet" index funds is that they are paying extra for a service that's not being provided. In fact, a recent article in


magazine noted that a number of 401(k) pension funds have initiated lawsuits because their participants are being charged for active management, but are instead being offered funds that they claim are essentially index trackers.

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TheStreet Recommends Ratings screened for stock funds performing suspiciously in line with the S&P 500 index in an attempt to identify closet indexers. (We excluded funds that call themselves index funds.) We arrived at the list of 20 suspects in the accompanying table by computing the performance differences between funds and the S&P 500 for periods including the three months, 12 months and three years (annualized) ending Nov. 30.

We then summed up the absolute values of the divergences and selected those that total less than a combined 1.0 percentage point for the three periods combined.

The three-month performance column of the accompanying table shows returns in the 7%-8% range, all close to 7.94% for the S&P 500. For the 12-month period, the list's components all turned in gains in the 13%-14% range, again within a whisper of the S&P 500's 14.23% gain for the period. For three years, the funds clustered in the high-11% to low-12% range, none very far from the S&P 500's 11.81% return. Because the time periods experience some overlap, recent performance weighs most heavily in the overall assessments.

Perhaps the most striking set of numbers in the table is in the expense-ratio column. The index-like performance these funds have been delivering to their shareholders has been at an average cost of more than seven times the expense ratio of the popular Vanguard 500 Index Fund Investor Class (which, for comparative purposes, is listed at the bottom of the table). Ratings crunched out a second set of numbers for those with a quantitative persuasion. From the funds in the longer list, it identified those with three-year R-squared values of at least 95%. R-squared is a measure of the degree to which fluctuations in a fund are explained by movements in "the market" (defined as the S&P 500 for the funds on the list). Thus, for the funds on the shorter table, it is accurate to deduce that their fluctuations tend to be 95% explains by movements in the S&P.

The "three-year beta coefficient" column in the table indicates the relative amplitude of movements in the fund relative to the S&P. For example, a fund with a beta of 1.10 will tend to experience total-return movements roughly 10% higher than the S&P in up periods and 10% lower during down moves. The betas are all extremely close to those of the S&P, as are their three-year standard deviations, all indications that these particular funds are closely correlated with the popular index.

It is likely that not all the funds on the list are piloted by managers who are deliberately trying to mimic the S&P 500. The presence of some -- or possibly all -- of the funds are likely to be what statisticians call "spurious correlations" where performance just by chance happened to come close to the index over a period of time. With thousands of funds, it is possible that some would come close to replicating, say, the Stock Exchange of Thailand Index over time, even if none of their investments had anything to do with Thai stocks.

Revealingly, Ratings grades for the funds on the list tend to be midrange, as might be expected by the tendency for the funds to perform in line with the crowd. Neither strong buy grades in the A range nor strong sell E grades appear on the list. Because TSC Ratings scores are based on a number of factors, including manager tenure, some variance in grades exists even among funds whose performance closely tracks that of the S&P 500.

Still, the weight of evidence is saying that the list should be monitored for any that funds might be charging "performance" fees for "passive" management.

Widows is a financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.