John Rekenthaler is baffled.

In his latest Morningstar column, he examines what he calls "closet indexers," funds that are supposed to be actively managed and charge management fees but look like a market index. Closet indexers are supposed to have an R-squared statistic in the upper 90s.

He picks out Nuveen Real Estate Securities as one of the worst offenders which an R-squared of 99. Despite moving almost completely in unison with the index, its annual expenses are 1.28 percent compared to 0.24 percent for Vanguard REIT Index.

The Nuveen fund appeared to beat both the Vanguard [profile] REIT and Dow Jones Real Estate Index with less market exposure and risk. He assessed non-market risk by looking at 10-year standard deviations and found Nuveen's figure was lower. Surely there must be a pitfall somewhere? Actively managed funds hardly ever perform better than the index in a 10 year period, Rekenthaler writes.

Rekenthaler said further analysis of Nuveen's edge is past the scope of that day's column. Let's hope he has some answers next week!

To read more and see Rekenthaler's charts, click here. 

Edited by: Casey Quinlan


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