Mendoza School of Business

Many active managers cannot justify fees

Published: March 12, 2014 / Author: John Authers

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.

read the entire article, visit The Financial Times website.


Topics: Mendoza