Active Share

Active Share measures the percentage of fund holdings that is different from the benchmark holdings. It was introduced in the paper "How Active is your Fund Manager", by Martijn Cremers and Antti Petajisto, published in the Review of Financial Studies in 2009, available for free on SSRN.

If a fund has an Active Share of 60%, then 40% of the holdings of the fund are identical to the holdings of the benchmark, and 60% of the holdings are different (constituting either over-weights or under-weights relative to the holdings of the benchmark).

Active Share is not a measure of skill but rather measures how different the fund's holdings are relative to the holdings of the particular benchmark considered. Any difference in performance can only come from fund positions that are different from the benchmark positions, i.e., that are 'active', and for any given fund, higher Active Share could lead to either underperformance or outperformance.

Active Share Calculation

Active Share can most easily be calculated as 100% minus the sum of the overlapping portfolio weights.

Here are some examples to illustrate how Active Share works for equity funds. First, any fund position in a stock that is not included in the benchmark results in no overlap with the benchmark and thus contributes to a higher Active Share. Second, for fund positions in stocks that are included in the benchmark, let's assume that a particular stock has a 2% weight in the benchmark.

  • If the fund also has a 2% weight in that stock, then its holding in the stock completely overlaps with the weight of that fund in the benchmark. As a result, the fund has no active (or different) weight in the stock, and thus this position contribute to a lower Active Share.
  • If the fund has a 3% weight in that stock, then the fund has a 1% overweight together with a 2% overlap. The 1% overweight will contribute to a higher Active Share and the 2% overlap to a lower Active Share.
  • If the fund does not own that stock at all, i.e., has a zero weight in that stock, then the fund has a 2% underweight in that stock relative to the benchmark, which contributes to a higher Active Share.

 

New paper forthcoming in the Financial Analysts Journal (freely available on SSRN, new version of December 2016): "Active Share and the Three Pillars of Active Management: Skill, Conviction and Opportunity", University of Notre Dame working paper

  • 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.

 

This website is maintained by Martijn Cremers.