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Active Share and the cost of trading

City of London

There are some funds that are marketed (and therefore attract a fund management fee rate) as being actively managed, but in practice they actually do little more than track a benchmark. It’s a common problem in the asset management industry.

For this reason I was fascinated to learn recently about a new term called ‘Active Share’. This is a financial tool that tells you how active the management of your fund really is. Active Share measures the percentage of stock holdings in a manager’s portfolio that differ from the benchmark index. Researchers have concluded that managers with high Active Share outperform their benchmark indexes and that Active Share significantly predicts fund performance.

Active Share is also useful in identifying managers who claim to be active but whose portfolios are very similar to the benchmark portfolio. Identifying these ‘closet indexers’ is extremely important because active management fees can be a significant hurdle to outperforming the index for anyone holding a portfolio similar to its benchmark.

It’s a powerful tool that needs to be more widely understood and utilised across the market, so that asset owners can really evaluate whether they are getting what they are paying for.

Asset owners need to understand how much activity they want, because trading comes at a cost.

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