“Active Share” Insights from Yale
In their paper titled: How Active is Your Fund Manager? A New Measure That Predicts Performance K.J Martijn Cremers and Antti Petajisto, Finance professors at Yale School of Management, introduced, in 2009, a new measure of active portfolio management called Active Share.
They found that funds with the highest Active Share significantly outperformed their benchmarks, both before and after expenses, and they exhibited strong performance persistence.
They also found that funds with the lowest Active Share and highest tracking error did worst, followed by funds with the lowest Active Share and lowest tracking error (coined “Closet Indexers”) which tended to lose money (compared to pure indexing) after fees and transaction costs.*
How does this Active Share insight translate into an Evidence Based Investing (EBI) strategy we can implement at Janiczek Wealth Management?
Clearly, for segments of the market that we believe have the ability to benefit by active management, seeking active managers with high Active Share and high tracking error can prove to be the most profitable approach.
Additionally, it’s the funds with the lowest Active Share and highest tracking error and lowest Active Share and lowest tracking error (“closet indexers”) we want to avoid.
If we believe a segment of the market has a lower probability of benefiting by an active manager, even an active manager with high Active Share and high tracking error, this is where we will want to employ a lean index fund to gain diversified exposure at the lowest cost.
A Note to Prospective Clients
When we evaluate your current portfolio management approach and holdings, we will do our best to examine the Active Share and tracking error characteristics of your holdings, if available. It will be our pleasure to liberate you from closet indexers and low Active Share, high tracking error active managers not adding value to your portfolio.
We hope you found this helpful. Please be sure to read our Important Disclosures as it is important to understand that, in spite of best efforts and/or intentions by us or others, there are no guarantees any strategy or approach utilized will succeed or be profitable.