What active share can and can’t tell you

After 13 fund companies agreed to voluntarily disclose the active share metrics for their funds following an investigation by the New York attorney general, Investment News interviewed Martijn Cremers, the Bernard J. Hank Professor of Finance at Mendoza College of Business whose 2009 paper (co-authored with Antti Petajisto) introduced the measure of active portfolio management. 

“One of the strongest predictors for underperformance is low active share coupled with high fees,” Mr. Cremers said. “In order for a fund to earn back its fees, it needs to outperform, and that outperformance can only come from different holdings than the index.”

His general guideline: If a fund has less than a 70% active share and a expense fee of more than 0.30, it’s likely to underperform.

Read the full story here.