Understanding Active Share

Active share measures the percentage of stocks in a portfolio that are different from those in the benchmark.

Active management is a style that fundamentally rejects benchmark hugging. One key criteria of truly active management is active share: the percentage of stocks in a portfolio that are different from those in the benchmark.

Active share can help identify "closet indexers" - those who claim to use active management but don’t actually differentiate their portfolios significantly from the index.

It tells us just how ‘active’ a manager really is; rather than mirroring the benchmark it measures how far the manager goes beyond it. The fees that you pay for active management should get you exactly that: high active share can help deliver benchmark-beating performance.

When it comes to active share, bigger is better; a higher number means more of the portfolio stands out from its index.

The active advantage

ACTIVE MATTERS BY THE NUMBERS

Research by Financial Analyst Journal shows that managers with high active share had a net return of 1.3%, outperforming their low active share counterparts by 2.2% annually, as illustrated.

The same research shows that high active share managers outperformed their respective indices by 1.35% during the same time period, after fees.

Source: Financial Analysts Journal Volume 69 · Number 4: "Active Share and Mutual Fund Performance", Antti Petajisto, 2013 CFA Institute.

Understanding Fees

Mutual Fund Basics: Understanding Fees

Dynamic Education Series

THE LOW-FEE TRADE-OFF

With investment fees coming under increased scrutiny these days, we take a look at the true value of performance, active management and financial advice in reaching your financial goals in contrast to low-fee options.

Resources to help you understand fees:

Active management vs. closet indexing

UNDERSTAND THE DIFFERENCE

Closet indexing means that investors are paying for active management while getting less than their fair share of market returns. And it’s a problem in Canada. According to a global study of the mutual fund industry¹, more than one-third of Canadian assets under management (37%) are held in closet index funds (funds with an active share below 60% yet claiming to be actively managed).

¹ Indexing and Active Fund Management: International Evidence*. Martin Cremers et al.; January 2015.

ACTIVE SHARE CAN HELP

Active share can help identify "closet indexers" - those who charge active fees but don’t actually differentiate their portfolios significantly from the index.

Learn more about and the power of portfolio concentration.