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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

Active Share

Another dimension for assessing active management

active portfolio 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
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
active share1
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

basic idea
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
active share2
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%)
active share3
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
case study active share and size aum
Case study: Active share and size (AUM)

Source: Petajisto (FAJ 2013)

case study fidelity magellan fund
Case study: Fidelity Magellan Fund

Source: Petajisto (FAJ 2013)

industry is taking note
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?