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.


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