Is Your Fund Manager Active Enough?

In 2004, Antti Petajisto and Martijn Cremers, then colleagues in the finance department at the Yale School of Management, took particular interest in an article in The Wall Street Journal about the Fidelity Magellan Fund. The article called Magellan’s manager, then Robert Stansky, a closet indexer because the fund’s returns closely tracked those of the Standard & Poor’s 500. “I was thinking that made sense, but it could also be that they were just very good at risk management and very well diversified,” says Cremers, now a professor of finance at the University of Notre Dame. “To make that distinction, you really have to look under the hood.”

“There was so much discussion of closet indexing, but no one was putting numbers to these claims,” says Petajisto, who now works in global tactical asset allocation at BlackRock.

With that in mind, Cremers and Petajisto teamed up to find how to differentiate true stockpickers from closet indexers. They finished the first draft of their research in 2006 and in 2009 published a paper, “How Active Is Your Fund Manager? A New Measure That Predicts Performance.” That measure — which they named “active share” — is the percentage of a fund’s weight-adjusted portfolio that differs from its benchmark. Not exactly rocket science. “I’m the first to admit that our measure is very obvious,” says Cremers. “I like to think that its simplicity gives it strength.”

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