The Evidence Mounts Against Active Share

Since the initial publication of research documenting active share, its advocates have clung to the belief that the metric could identify funds that would outperform. But the academic evidence has all but disproven that thesis.

An overwhelming body of academic research demonstrates that the past performance of actively managed mutual funds does not provide valuable information as to future performance, and (as the annual SPIVA Persistence Scorecards regularly report) there is less persistence of outperformance than randomly expected. Yet, believers in active management were offered hope with the 2009 study by Martijn Cremers and Antti Petajisto, “How Active Is Your Fund Manager: A New Measure That Predicts Performance,” published in The Review of Financial Studies. The authors concluded: “Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence.”

Active share is a measure of how much a fund’s holdings deviate from its benchmark index, and funds with the highest active share tend to have the best performance. Thus, while there’s no doubt that, in aggregate, active management underperforms and the majority of active funds underperform every year (and the percentage that underperform increases with the time horizon studied), if an investor were able to identify the few future winners by using active share as a measure, active management could be the winning strategy.