This podcast episode explores the rise of closet indexing, where active managers closely track an index to minimize performance volatility and retain clients. The speakers discuss the business incentives behind closet indexing and provide examples of its impact on investor returns. They also delve into the concepts of active share and tracking error, highlighting the importance of balancing high active share with correlation in concentrated portfolios. The benefits and drawbacks of both concentrated portfolios and closet indexing are discussed, emphasizing the importance of transparency in investing.
