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Royal Bank of Canada on Bay Street in the heart of the financial district in Toronto on 2015.

Mark Blinch/Reuters

A British Columbia judge has given the green light for a class-action lawsuit against Canada’s largest bank alleging that investors were overcharged for actively managed mutual funds that did little more than mimic benchmark indexes.

In a judgment last week, Justice Gordon Funt of the Supreme Court of British Columbia certified a national class action against RBC Global Asset Management Inc. and its subsidiary, Royal Trust Co., which means the case has met the hurdles to proceed to trial.

The class action alleges that excessive fees paid by mutual fund investors to RBC since 2005 have significantly reduced their returns from one of the company’s most widely held mutual funds: the RBC Canadian Equity Fund.

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A spokesperson for RBC declined to comment as it is a continuing legal matter.

This is the second class action in Canada to be certified involving allegations of “closet indexing,” where a portfolio manager mimics the stock selection of a benchmark index, such as the S&P/TSX composite, while claiming the fund is actively managed.

Last July, the same court certified a class-action lawsuit against TD Asset Management Inc. regarding similar allegations for a group of TD investors who held money in the TD Canadian Equity Fund. A court date has been set for September, 2021.

Two law firms, Investigation Counsel PC and Bates Barristers PC, filed both class-action lawsuits in 2019.

“We’re pleased with the [RBC certification] decision because class procedure is an efficient, effective and fair way to resolve investors’ complaints about poor disclosure of a fund manager’s investment strategies and excessive fees,” Paul Bates, co-counsel for the two plaintiffs, said on Monday.

Actively managed funds change their portfolio positions on a regular basis in order to hold securities that the fund manager expects to outperform the funds’ respective benchmarks. As a result, portfolio managers typically charge higher fees for actively managed funds than for index funds because of the higher expenses associated with research to select stocks. In addition to higher management fees, active funds also have higher expenses associated with increased trading activity. In return for the higher fees, investors assume portfolio managers will produce better returns than the benchmark.

But in recent years, some actively managed funds have faced criticisms that the investment holdings that are “actively” selected by portfolio managers are only emulating a selection of holdings found in a benchmark index – earning them the moniker “closet indexers.”

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The plaintiffs are asking RBC to repay the excess fees and costs to investors, which could add up to hundreds of millions of dollars since 2005. The lawsuit was filed on behalf of RBC investors who held units of the RBC Canadian Equity Fund at any time from June 1, 2005, to the present.

According to court documents, RBC investors Annabelle McCorquodale and Robert Cummings claimed they suffered substantial damages as a result of “unjustified fees” by RBC Global Asset Management’s undisclosed investment strategy that closely tracked or replicated an index fund.

Management fees on the most common series of this fund range between 1.6 per cent to 1.75 per cent during the class-action period, the lawsuit said.

By comparison, a passive index-tracking strategy, such as an iShares exchange-traded fund, which tracks the S&P/TSX, charges substantially lower fees of between 0.05 per cent and 0.25 per cent.

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