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About Active Share

Active Share is the percentage of fund holdings that is different from the benchmark holdings. A fund that has no holdings in common with the benchmark will have an Active Share of 100%, and a fund that has exactly the same holdings as the benchmark considered will have an Active Share of 0%. 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.

Research has shown that as a group and over fairly long periods of time:

  • funds with low Active Shares have tended to underperform their benchmarks net of costs
  • funds with high Active Shares have tended to outperform their benchmarks net of costs, especially among funds that do not trade frequently, among small cap funds and among funds that do not have very large assets under management (see further the section 'Active Share Research').

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 naturally 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.

About www.ActiveShare.info

The website is maintained and © by Martijn Cremers, Professor of Finance at the Mendoza College of Business of the University of Notre Dame. Data is updated about once a year. The information provided is for an informational purpose only, is given without charge and on a best-effort basis. Data errors may be present, and please notify us if you find any. Please refer and/or link to www.ActiveShare.info when using any of the information provided here in any materials. Read our Terms of Service for further information.

About Martijn Cremers

K.J. Martijn Cremers joined the University of Notre Dame as Professor of Finance at the Mendoza College of Business in 2012. Prior to that, he was a faculty at Yale School of Management from 2002 – 2012, after obtaining his PhD in finance from the Stern School of Business at New York University. Hailing from the Netherlands, his undergraduate degree in Econometrics is from the VU University Amsterdam.

Professor Cremers' research focuses on empirical issues in investments and corporate governance. His academic work has been published in top academic journals such as the Journal of Finance, the Review of Financial Studies, the Journal of Financial Economics, the Stanford Law Review and Northwestern Law Review. His research has also been covered in newspapers like the Wall Street Journal, the Financial Times and numerous others.

He is an Associate Editor of the journal European Financial Management (2012-present) and previously was an Associate Editor of the Review of Financial Studies and of the Review of Finance. Professor Cremers has consulting relationships with various investment management firms.

At Notre Dame, he teaches courses on investment management, corporate governance and business ethics to MBA and undergraduate students.

His paper "How active is your fund manager? A new measure that predicts performance" (published in 2009 in the Review of Financial Studies) introduced a measure of active management named 'Active Share', which is based on a comparison of the holdings of a fund with those of its benchmark. The 'Active Share' measure has become widely used in the financial industry and was e.g. incorporated in Morningstar Direct and FactSet.

His academic website can be accessed here:

http://mendoza.nd.edu/research-and-faculty/directory/martijn-cremers/

Active Share Research

The papers below, co-authored by Martijn Cremers, provide further background and explanation. For more information on his academic research on Active Share, see activeshare.nd.edu.

    • "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, Laura Starks), published in the Journal of Financial Economics 120(3), 539-560, 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), published in the Journal of Financial Economics 122, p. 288-306, 2016
      • 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.
    • “Do Mutual Fund Investors Get What They Pay For? The Legal Consequences of Closet Index Funds”, (with Quinn Curtis), 2016, Virginia Law & Business Review 11(1), 31-93
      • 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.
    • "Active Share and the Three Pillars of Active Management: Skill, Conviction and Opportunity", published in the Financial Analysts Journal, 2017, vol. 73, no. 2 (Second Quarter): 61-79
      • 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 actively managed funds: investors should not pay (too) much for low Active Share funds which generally underperform, there is no evidence that high Active Share funds as a group have underperformed, while patient managers with high Active Share have been quite successful.
    • "Benchmark Discrepancies and Mutual Fund Performance Evaluation", (with Jon A. Fulkerson, Timothy B. Riley)
      • Abstract: We introduce a new holdings-based procedure to identify whether a mutual fund has a benchmark discrepancy, which we define as a benchmark other than the prospectus benchmark best matching a fund’s investment strategy. Funds with a benchmark discrepancy tend to be riskier than their prospectus benchmarks indicate. As a result, the funds on average outperform their prospectus benchmarks—before further risk-adjusting—despite underperforming the benchmarks that best match their portfolios. High active share funds outperform to a greater degree if there is no benchmark discrepancy, suggesting that active managers with more skill are less likely to have a benchmark discrepancy.
    • "Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Active Managed Mutual Funds", (with Jon A. Fulkerson, Timothy B. Riley)
      • Abstract: Just over 20 years have passed since the publication of Carhart’s landmark 1997 study on mutual funds. Its conclusion—that the data did “not support the existence of skilled or informed mutual fund portfolio managers”—was the capstone of an academic literature beginning with Jensen (1968) that formed the ‘conventional wisdom’ that active management does not create value for investors. In this paper, we review the literature on active mutual fund management since the publication of Carhart (1997) to assess the extent to which current research still supports the conventional wisdom. Our review of the most recent literature suggests that the conventional wisdom is too negative on the value of active management.
    • "Active Share and the Predictability of the Performance of Separate Accounts", (With Jon Fulkerson, Tim Riley)
      • Abstract: Separate accounts are a large and unique, but understudied, part of the investment management industry. Within our sample, on net, the average separate account underperforms, but for those with high active share, we find positive performance persistence. Among high active share separate accounts, a portfolio of those with strong past performance has a subsequent net alpha of 1.38% per year (t-stat = 2.11). That result strengthens when return dispersion is high and among separate accounts with a small cap style, a fundamental investment approach, or lower cash holdings. These results provide out of sample support for the predictive utility of active share.