Active Share Is Not a Silver Bullet

While active share, which measures the extent to which a stock fund’s holdings overlap with a specified benchmark index, can be useful information for investors, a recent article in Morningstar argues that “it’s probably not a must-have.” The assertion came in the wake of New York Attorney General Eric Schneiderman’s recent announcement that 13 companies had voluntarily agreed to disclose active share to retail investors, describing it as “critical information” to be used in making… Read More

Zweig on Closet Indexing & Active Share

For many years, argues Jason Zweig in last month’s Wall Street Journal, “many fund managers haven’t done much managing at all.” Instead, he writes, they track market indices and “buy a bit more of this stock and a little less of that one, in what’s known as closet indexing.” The problem, however, is that active fund management clients are paying hefty fees for what amounts to passive management. “To call such chicken-hearted tweaks ‘active management’”… Read More

Active Share is not a Predictor of Fund Performance

At a time when fund expenses are increasingly under scrutiny, some have turned to active share (the level of correlation between an index fund and its benchmark) as a predictor of fund performance and a means of justifying hefty management expenses. A higher active share (on a scale of 0 to 100) means a fund bears less resemblance to its benchmark. Some would argue that this indicates a higher level of active management, a higher… Read More

How to Measure a Fund’s Level of “Active” Investing

Investors and a growing number of regulators are taking a closer look at funds that claim to be actively managed but, in fact, may not be justifying their hefty fees. A recent Morningstar article explains the concept of “active share”, a metric developed in 2006 that quantifies how much an equity portfolio’s holdings differ from those of its benchmark. An actively managed portfolio can be divided into two components: One part consists of holdings that… Read More

Closet Indexers Will Go the Way of the Buggy and the Whip

“The decade long run of money moving out of actively managed mutual funds in favor of passive indexes and exchange-traded products speaks volumes about investors’ palate for active management these days,” according to a recent article in Investment News. The piece touches on how to identify active managers who are not simply hugging the benchmark in an overly cautious effort not to get beat by it.  The key is to be selective, according to the… Read More

The Good, Bad and Ugly of High Active Share

Patrick O’Shaughnessy, portfolio manager at O’Shaughnessy Asset Management and curator of the investment blog, The Investor Field Guide, explains that active share – a measure that shows how different a portfolio is from its preferred benchmark – helps measure the “potential” of a fund or strategy’s excess return. O’Shaughnessy runs a number of simulations that show the outperformance and underperformance potential of a portfolio with varying degrees of active share compared to the S&P 500.… Read More