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How Active is that Active Manager Really?

As we all know, active versus passive management is a highly controversial topic in the investment world (it’s been known to lead to some heated debates here at Optima Group!). But more recently, another separate but somewhat related theme has arisen. Many are asking whether some “active” managers are really so active after all and, if you use a defined measure to categorize managers as more or less active, what is the performance story?

We are talking, of course, about the idea of Active Share, which quantifies the amount by which a manager’s portfolio deviates from the index. The calculation of Active Share is simple; the absolute value of the differences between the portfolio and the benchmark are summed up and then divided by two. The more the portfolio differs from the benchmark, the higher the Active Share. Active Share can range between 0%, indicating that the portfolio and the benchmark track exactly, and 100%, or completely active versus the benchmark. So what, you might say?

Well, the next logical step is to compare the performance of those with high Active Share versus low Active Share. The definitive study on Active Share was completed by Cremers and Petajisto and published in 2009. It found that funds with a high Active Share typically had outperformed their benchmark historically by 1.51% to 2.40%. Conversely, those funds with a low Active Share typically underperformed by -1.42% to -1.83%.

The takeaways? One, reports of the death of active management may have been greatly exaggerated. Two, if you are going to go with an active manager, make sure they are really active and not “closet indexers” or “factor bets.”