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 resemble those of the benchmark (considered the “passive” portion), while the remaining holdings constitute the “active” component. It’s this active portion that is measured by active share. If holdings are identical to the benchmark, they would reflect an active share of 0%. Conversely, active share of 100% would indicate no common holdings with the index. The higher the active share, the more actively the fund is managed.

The Morningstar article notes, however, that active share should not be used in isolation. A “clever fund selector” combines it with other statistical measurements (such as R-squared and tracking error) that are shown on Morningstar’s website for every fund with more than 3 years of history. Active share figures, on the other hand, are only available to industry professionals. The article emphasizes that, in any fund review process, active share should be used in combination with other data points and quantitative measures such as fees charged, overall investment process, and a fund’s team resources and stability.