How Active is Your Fund Manager? A New Measure That Predicts Performance

Martijn Cremers, Antti Petäjistö

SSRN Electronic Journal · 2009 · 409 citations · 34 references

DOIFull text

Open access

Concepts

TL;DR

The study introduces Active Share, a measure of the proportion of a portfolio that differs from its benchmark. Active Share was calculated for domestic equity mutual funds from 1980 to 2003, and its relationship to size, expenses, turnover, and temporal evolution was examined. Funds with the highest Active Share significantly outperformed their benchmarks before and after expenses, while those with the lowest Active Share underperformed.

Abstract

We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings. We compute Active Share for domestic equity mutual funds from 1980 to 2003. We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Non-index funds with the lowest Active Share underperform their benchmarks.

References

34