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Active Share

Active Share. Another dimension for assessing active management. Active portfolio management. Active stock picking: will deviate from the benchmark For the fees you pay, how active is the manager? Tracking error Active share. Tracking error. Standard deviation of ( r P – r B )

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Active Share

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  1. Active Share Another dimension for assessing active management

  2. Active portfolio management • Active stock picking: will deviate from the benchmark • For the fees you pay, how active is the manager? • Tracking error • Active share

  3. Tracking error • Standard deviation of (rP –rB) • Returns-based, uses historical returns of the portfolio and its benchmark • Compares overall portfolio returns to overall benchmark returns

  4. Active share • A holdings-based measure of the degree of active management • Cremers and Petajisto (RFS 2009)* • Absolute differences in portfolio weights for all securities in the portfolio compared to the benchmark • How active is the manager in taking individual stock positions? *How Active Is Your Fund Manager? A New Measure That Predicts Performance Review of Financial Studies, 2009, 22(9):3329-3365

  5. Basic idea • $100 to invest in either an index fund or an active portfolio • 20% long positions; 20% short positions on the index • If sum up the over/under-weights, will get zero. So take the absolute value

  6. Active share • Definition where n = number of stocks in the index • Divide the sum of the portfolio weight differences by 2, so that active share lies between zero and 100% for long-only portfolios • (For hedge funds, use of leverage and net short positions can cause Active Share > 100%)

  7. Active share • The higher the active share,  active stock picking • If Active Share = 60% 40% overlap with the index • If Active Share = 100%  0% overlap with the index • Note: equal weight, simply taking a count of the extent of active positions

  8. Case study: Active share and size (AUM) Source: Petajisto (FAJ 2013)

  9. Case study: Fidelity Magellan Fund Source: Petajisto (FAJ 2013)

  10. Active share quintiles and fund performance

  11. Industry is taking note • Active share is provided by Morningstar Direct for each fund in its database • Exercise: what is Mawer’s Q3 active share?

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