What active share can and can't tell you

Real active management or closet index? Active share can help you figure it out

May 3, 2018 @ 11:28 am

By John Waggoner

Thanks to an agreement with former New York Attorney General Eric Schneiderman, 13 fund companies will voluntarily disclose the active share calculation for their funds. What exactly does the calculation show you?

Active share is the percentage of a fund's holdings that are different from its benchmark index. The lower the active share percentage, the more closely the fund resembles its benchmark. A fund that has no holdings in common with the benchmark will have an active share of 100%, and a fund that has exactly the same holdings as the benchmark will have an active share of 0%.

"I think of active share as a very basic diagnostic tool," said Martijn Cremers, the creator of active share and the Bernard J. Hank Professor at Mendoza College of Business at the University of Notre Dame. "At a basic level, it tells you about a fund's holdings relative to its benchmark — it tells you what you're paying for, not how you're different."

After all, Mr. Cremers said, if you pay a fee for mutual fund management, you'd expect your fund's portfolio to be substantially different from its benchmark.

"If you have a fund that does a lot of stock picking, you'd expect active share to be high," he said. "Then within that group, you'd look at fund performance, risk and the fund's strategy."

Large-cap managers have somewhat less opportunity to have a high active share, simply because there are fewer large-company stocks than mid-cap or small-cap stocks.

"An active share of about 80% is pretty high for a large-cap manager," Mr. Cremers said. "It's about 90% for mid-cap and 95% for small-cap funds."

Probably the greatest advantage of the active share calculation is that it can tell you how much you're paying for your fund's active management.

"One of the strongest predictors for underperformance is low active share coupled with high fees," Mr. Cremers said. "In order for a fund to earn back its fees, it needs to outperform, and that outperformance can only come from different holdings than the index."

His general guideline: If a fund has less than a 70% active share and a expense fee of more than 0.30, it's likely to underperform.

For example, Putnam Investors Fund, a $2 billion large-company blend fund, had a 45% active share in 2016, according to activeshare.info. It also had an expense ratio of about 1%. The fund lagged the Standard & Poor's 500 stock index by 8.27 percentage points in 2017.

InvestmentNews had Morningstar calculate the active share of the 15 largest mutual funds, which you can find here. You can also find data on active share here.

The firms that have agreed to publish active share information are: AllianceBernstein, BlackRock, Dreyfus, The Capital Group (American Funds), Columbia Management, Eaton Vance, Goldman Sachs, JP Morgan Chase, OppenheimerFunds, Nuveen, T. Rowe Price, USAA and Vanguard. Each of the firms will post on their websites the active share of the relevant funds on a quarterly basis.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

What's behind the TCA, ETrade deal?

Deputy editor Bob Hordt talks with senior columnist Jeff Benjamin about what each party in the recent acquisition stands to gain by joining forces.

Latest news & opinion

What's in a name? For TCA by ETrade, everything

Trust Company of America is gone, and there's big buzz over the name change. But turning the custodian into an industry powerhouse will take a lot longer — if it happens at all.

When it comes to regulating AI in financial services, murky waters are ahead

Laws are unclear on how the technology fits in with compliance.

As Ameriprise case shows, firms on hook when brokers go bad ​

The SEC will collect $4.5 million from the brokerage firm for failing to supervise brokers who were ripping off clients.

10 highest paid professions in America today

These are the top-paying jobs in the U.S., according to Glassdoor.

Ameriprise to pay $4.5 million to settle SEC charges that five reps stole more than $1 million from clients

Agency censures firm for not protecting clients from thieving brokers.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print