5 Things All Institutional Investors Should Know About Active Share

As the debate on active vs. passive investment strategies and management continues, institutional investors are constantly looking for ways to measure the effectiveness of active positions. Are active asset managers earning their fees? Are they able to ensure higher returns than benchmark funds? Active share, which compares the weight of individual securities in a portfolio to those in its benchmark, can shed light on these questions for those who understand how to use the tool. Here are five key things all institutional investors should know about active share.

1) For most actively managed portfolios, active share falls between 60 and 90. But when a portfolio holds the same securities in the same amounts as the benchmark, there is no difference in positions and active share equals zero. Similarly, a portfolio that holds none of the securities in its benchmark has an active share of 100.

2). High active share doesn’t necessarily translate into higher returns than a benchmark. A high active share portfolio has the potential for generating excess returns through the investment choices the manager makes that are different from the benchmark. Actual returns are dependent on a manager’s skill in selecting securities, choosing geographies and industries to invest in and other factors.

3) Equity benchmarks hold no cash, but active managers do. All else being equal, a higher cash position typically brings higher active share.

4) Active share efficiency evaluates excess return relative to active share and measures the rewards resulting from a manager’s active positions. It is useful for monitoring the value added of individual managers through time and allows comparisons of efficiency across managers with different degrees of active management.

5) Peer share efficiency further refines the picture. It is a measure that groups managers according to their particular styles, market cap ranges, geographies and other portfolio characteristics and compares a manager’s efficiency to the group.

To learn more about active share measurements, the formulas for calculating them and how they can help gauge and monitor asset manager performance, download the “Active Share Efficiency: A Measure Beyond Active Share” whitepaper from Marietta-based eVestment here.