Active share is a measure that has come more into the spotlight over the past couple of years as active managers try to justify their loftier fees versus cheaper passive funds. Indeed, the average active fund fee is c. 65 basis points against 10-15bps charged by passive funds).
For those less familiar with active share, it is a measure of the percentage of stock holdings in a portfolio that differ from its benchmark index. This can be higher due to off benchmark holdings or simply by having larger or reduced levels of exposure in an index constituent. A fund that has high active share will have significantly deviated from the index, whereas a passive fund will closely track the index.
We think active share is important as this level of deviation is key to performing in a differentiated manner to the index. It provides the ability to outperform or meet a more specific investment objective and this could justify paying additional active fees.
The regulator is taking note of this development in the market with the European Securities and Markets Authority (ESMA) stating: “A fund with an active share of less than 60% and a tracking error (TE) of less than 4% could be classified as a closet tracker.” Up to 5-15% of the “active fund” market could be categorised in this manner.
With investors becoming increasingly price conscious, ESMA’s comment might go some way to explain why, according to Morningstar, passive mutual funds have grown 230% globally since 2007 to $6trn, while, in contrast, active funds have grown 54% to $24trn.
Investors may not feel they are getting value for money when investing via active managers and the US market is perhaps a prime example where tracking the S&P over the last two-three years has resulted in healthy returns that have rarely been matched by active managers.
