Active Share Study

What Is the Active Share Study?

The active share study was a scholarly study conducted by specialists from the Yale School of Management in 2006. The study inspected how much a mutual fund holding contrasted from its benchmark. The difference is alluded to as the active share. The study revealed a positive correlation between a fund's active share value and the fund's performance against its benchmark; the greater the difference between the fund's asset composition and its benchmark, the greater the active share.

Understanding the Active Share Study

The study, "How Active is Your Fund Manager? A New Measure That Predicts Performance," was conducted by finance teachers Antti Petajisto and Martijn Cremers. Petajisto and Cremers confirmed a positive correlation between a fund's active share value and the fund's performance against its benchmark.

Active share is the negligible portion of a fund's portfolio holdings that digress from the benchmark index. The active share of a mutual fund goes from zero (pure index fund) to 100% (no overlap with the benchmark). Active management has generally been measured by tracking blunder, which measures the volatility of portfolio return relative to a benchmark index. Petajisto and Cremers' method involved active share in conjunction with tracking mistake to give a comprehensive image of how active a fund is in the components of the two holdings and returns.

Active Share Reveals "Closet Index Funds"

The active share study provocatively found that one-third of actively managed mutual funds were "closet indexers." Closet index funds are actively managed funds that closely mirror the holdings of their benchmarks while as yet charging active-management fees.

The method of measuring an active fund utilizing both tracking mistake and active share allows funds to be portrayed by how much and what type of active management they practice. Funds with high active share and low tracking blunder are diversified stock pickers (e.g., T. Rowe Price Small Cap); low active share and high tracking blunder are factor wagers (e.g., Investment Co. of America); high active share and high tracking blunder are concentrated stock pickers (e.g., Fidelity Low Price); low active share and low tracking mistake are closet indexers (e.g., Fidelity Magellan); and zero active-share and zero tracking mistake are pure index funds (e.g., Vanguard 500).

The Study's Findings

The study confirmed the conventional wisdom that smaller funds are all the more actively managed while a critical number of large funds, especially those funds with more than $1 billion in assets under management (AUM), are closet indexers.

The study's creators stated that as measured with active share, active management predicts fund performance. Funds with the highest active share fundamentally beat their benchmarks both before and after expenses, and their returns were consistent from one year to another. Funds with the lowest active share failed to meet expectations after expenses.

Highlights

• The active share study was a scholarly study conducted by specialists from the Yale School of Management in 2006.
• The greater the difference between the fund's asset composition and its benchmark, the greater the active share.
• The study inspected how much a mutual fund's holding contrasts from its benchmark, and the difference is the active share.