Active Share: Is Higher Better?

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Active management has been subject to a significant level of criticism as an increasing number of studies showed that the average active manager struggled to outperform the index trackers, net of fees and other expenses. However, many other studies have provided compelling evidence of positive excess returns, net of fees and other expenses, suggesting that some managers do exhibit skill.

This paper discusses how investors can maximize the likelihood of identifying those skillful managers. Specifically, we use the concept of active share to distinguish between different levels of active management in investment strategies within Mercer’s equity universes. Analysis within our research is, therefore, focused on investigating the relationship between active share and active (relative to index) returns for strategies within these universes.

The results of our analysis suggest that:

o  High active share strategies, on average, delivered stronger excess returns when compared to low active share strategies.

o  The stronger performance delivered by high active share funds cannot necessarily be associated with higher levels of risk (absolute or relative).

o  Within lower active share funds, those that are systematic equity strategies delivered meaningfully better outcomes than nonsystematic strategies (as measured by excess returns and information ratio). 

We believe that active share has relevance in equity manager selection, and it should be used as one of the measures to assess the degree of active management within investment portfolios. By combining insight from active share consideration with a robust and consistent research framework (such as the Mercer four factor framework), investors can identify a group of skillful portfolio managers who are poised for success.

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