Academic Research

These academic papers co-authored by Martijn Cremers provide further background and explanation on Active Share:

  • "How active is your fund manager? A new measure that predicts performance" (with Antti Petajisto), Review of Financial Studies, 22, 2009
    • Abstract: We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings. We compute Active Share for domestic equity mutual funds from 1980 to 2003. We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Non-index funds with the lowest Active Share underperform their benchmarks.
  • "Indexing and Active Fund Management: International Evidence" (with Miguel Ferreira, Pedro Matos, and Laura Starks), forthcoming in Journal of Financial Economics, 2016
    • Abstract: We examine the relation between indexing and active management in the mutual fund industry worldwide. Explicit indexing and closet indexing by active funds are associated with countries’ regulatory and financial market environments. We find that actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost explicitly indexed funds. A quasi-natural experiment using the exogenous variation in indexed funds generated by the passage of pension laws supports a causal interpretation of the results. Moreover, the average alpha generated by active management is higher in countries with more explicit indexing and lower in countries with more closet indexing. Overall, our evidence suggests that explicit indexing improves competition in the mutual fund industry.
  • "Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently" (with Ankur Pareek), forthcoming in Journal of Financial Economics  
    • Abstract: Among high Active Share portfolios – whose holdings differ substantially from their benchmark – only those with patient investment strategies (with holding durations of over 2 years) on average outperform, over 2% per year. Funds trading frequently generally underperform, including those with high Active Share. Among patient funds, separating closet index from high Active Share funds matters, as low Active Share funds on average underperform even with patient strategies. Our results suggest that U.S. equity markets provide opportunities for longer-term active managers, perhaps because of the limited arbitrage capital devoted to patient and active investment strategies.
  • "How Active Is Your Real Estate Fund Manager?" (with Colin Lizieri), Journal of Alternative Investments, Summer, 1-15, 2015
    • Using a holdings-based measure of active management termed the ‘Segment Active Share,’ the paper documents that commercial real estate portfolios that are more active – i.e., have segment weights which are least like those of the index – have outperformed. Employing proprietary IPD data for 256 U.K. real estate funds over 2002-2011, we find that funds with high Segment Active Share on average outperformed the real estate market by 1.9% per year. These funds do not seem to take increased risk and their outperformance cannot be explained by fund size alone, though on average they are smaller funds.
  • Do Mutual Fund Investors Get What They Pay For? The Legal Consequences of Closet Index Funds” (with Quinn Curtis), forthcoming in Virginia Law & Business Review 
    • Abstract: Actively managed mutual funds sell the potential to beat the market by picking stocks that are expected to outperform passive benchmarks like the S&P 500. Funds that are marketed as active vary substantially in the degree to which their portfolio holdings actually differ from the holdings of passive index funds. A purportedly active fund with a portfolio that substantially overlaps with the market is known as a closet index fund. Since closet index funds charge considerably higher fees than true index funds but provide a substantially similar portfolio, they tend to be poor investment choices. This article presents empirical evidence on closet index funds, showing that more than 10% of U.S. mutual fund assets are currently invested in closet index funds and that high cost closet index funds substantially underperform their benchmarks. We argue that persistent closet indexing implicates a number of legal issues, including possible liability for fund advisors under the Securities Act and the Investment Company Act. We conclude by discussing potential adjustments to mutual fund disclosures that could help investors identify closet index funds.
  • New"Active Share and the Three Pillars of Active Management: Skill, Conviction and Opportunity", forthcoming in the Financial Analysts Journal
    • Abstract: We introduce a new formula for Active Share that emphasizes that a fund’s Active Share is only reduced through overlapping holdings with its benchmark. Next, we relate Active Share to the fund manager’s individual stock picking skill, conviction and opportunity. We show why and how to adjust the expense ratio for the level of Active Share and the cost of investing in the benchmark. We conclude that Active Share matters for fund performance: investors should not pay (too) much for low Active Share funds, while among high Active Share funds only patient managers with long-term convictions have been successful.