The definition of ‘active-share study’
Active-share study refers to the scientific study conducted by researchers from Yale school of management in 2006. Active-share study, as a mutual Fund that holds different from the base, with the difference, called the active. The greater the difference between the assets of the Fund and its benchmark, the more active shares.
Breaking down the ‘active-share study’
Study “how active is Your Fund Manager? A new measure that predicts Performance,” Finance professors Antti Petajisto and Martijn Cremers, often called active-share study. According to the active-share study, there is a positive correlation between the Fund active stock Fund against its benchmark.
Active share-the proportion of the Fund in the portfolio that deviate from the underlying index. Active share mutual Fund ranges from zero (pure index Fund) to 100% (no match with the standard). Active management is traditionally measured tracking error, which measures the volatility of return of the portfolio relative to the benchmark index. Method Petajisto and Cremers used by the active participation combined with error tracking to provide a comprehensive picture of how actively the Fund on holdings and returns.
Active Participation Merrymaking “Closet Index Funds”
Active-share study provocatively, showed that one-third of actively managed mutual funds were “closet indexers”. Closet index funds are actively managed funds that are closely connected with the enterprise of their criteria, while still charging active-management fees.
Method of measuring active Fund, using both tracking error and active funds will be characterized by how many and what type of active management they practice. Funds with high active and low error accompany diversified point of view (for example, T. rowe Price Small-cap); the low active participation, and high tracking error factor bets (e.g., the investment company of America); high activity and a high proportion of bug tracking focused point of view (for example, fidelity low price); low active share and low tracking errors are closet indexers (for example, fidelity Magellan); and zero active share and zero tracking error are pure index funds (e.g. vanguard 500).
The study confirmed the widespread belief that small funds are more actively managed, while a significant number of large foundations, especially those with more than $1 billion in assets under management, were closet indexers. The study authors stated that the measured active stock, active management predicts Fund performance. Funds with high active share significantly outperformed their performance both before and after costs, and returns were persistent from year to year. Funds with low active share worse after expenses.