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Up until recently, it wasn’t clear how fund managers calculated their active share percentage. This began to change last year when 13 fund companies reached an agreement with the New York State Attorney to voluntarily disclose their calculation on a quarterly basis. The firms that have agreed to do so are: AllianceBernstein, BlackRock, Dreyfus, The Capital Group (American Funds), Columbia Management, Eaton Vance, Goldman Sachs, JPMorgan Chase, OppenheimerFunds, Nuveen, T. Rowe Price, USAA and Vanguard.
For a disclosure sample, check out Vanguard’s quarterly report on the active share of actively managed equity funds. This release contains 28 actively managed equity funds and the active share percentage of each. As you can see, the Capital Opportunity Fund (VHCOX) has the highest active share percentage at 92.4%. This means it has very few holdings in common with its benchmark.
Read more here if active managers are worth it.
While useful, active share doesn’t provide a complete picture of whether a fund is worth your time and money. Investors should certainly weigh the methodology but must avoid placing too much emphasis on the metrics. For starters, active share doesn’t account for sector or region rotations, a commonly employed tactic by fund managers.
It also says nothing about approaches that emphasize various factor-investing strategies such as size, quality or momentum. This is important given that many funds are utilizing smart-beta strategies with low active share but meaningfully different returns than the benchmark index. If one were to solely rely on active share, they may disregard these funds despite their market-beating performance.
Research undertaken by Vanguard shows that high active share wasn’t significantly related to subsequent fund outperformance between 2001-2011. Rather, to outperform a benchmark index, a fund must differ in either the securities that are chosen or their percentage weighting. A manager’s skill also plays a big role in the fund’s performance relative to its benchmark.
A good starting point for active share consideration is to look at its impact on cost and weigh the dimensions mentioned above. A fund with a high active share may also be more useful in a broadly diversified equity portfolio where active share isn’t a principal consideration. This is true of virtually any investing strategy, as it’s never wise to put all your eggs in one basket.
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