When choosing funds most investors want one of two things - either a fund that closely and cheaply tracks a particular market or index (a tracker fund), or a fund that employs a skilled fund manager to hopefully provide long-term outperformance of its benchmark.
'Active Share' can help assess an actively managed fund's potential to outperform. It measures what proportion of a portfolio is different from its benchmark index. The idea is that Active Share can help identify and avoid supposedly actively managed funds that are little more than closet tracker funds.
This is important as actively managed funds tend to have higher fees than their tracker counterparts. Where a manager has significant potential to deliver outperformance these higher fees can be justified, but where there is little active management investors would typically be better off holding a low-cost tracker.
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
A study in the US supports the importance of considering Active Share. It looked at 2,740 mutual funds from 1990 to 2009. It found funds with high Active Share produced, on average, 1.20% annual outperformance over the period. Funds with low Active Share - the closet trackers - produced, on average 0.89% annual underperformance.
However, just like past performance, Active Share has some shortcomings. Simply investing differently from your benchmark is no guarantee of success - a fund with high Active Share also has greater potential to underperform its benchmark. In other cases there simply isn’t an appropriate benchmark for a fund's Active Share to be measured against.
We use Active Share as part of a suite of tools when assessing a fund's potential. Crucially, our research suggests a manager's stock selection ability is one of the key drivers of long-term outperformance. We devote significant resources to getting under the bonnet of funds to understand the manager’s approach, and where they add value.
The culmination of all our research is our Wealth 150 and Multi-Manager funds. Our track record of identifying high quality fund managers speaks for itself. We believe these funds will serve investors well over the long term.
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.