Many active managers cannot justify fees

How active is your fund manager, and what
chance do they really have of beating the market?

These questions are linked. A crude measure
of how much fund managers deviate from their benchmark can help predict which
funds will outperform. That measure is “active share” – the percentage of a
fund’s portfolio that differs from its benchmark. Thus a well-managed index fund will have an
active share of 0 and an esoteric fund that holds no stocks in its index has an
active share of 100.

The concept was popularised by academics Martijn Cremers and
Antti Petajisto, who made two important discoveries. First, “closet indexing”,
where funds limit the risk of underperformance by clinging to the index, is
rife in the US. Second, the higher a fund’s active share, the stronger its
chance of beating its benchmark.

To
read the entire article, visit The Financial Times website.

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