active share definition
A New Measure That Predicts Performance.” Active share’s popularity has largely been driven by two factors. First, it appears simple and intuitive; active share is the proportion of a portfolio’s holdings that is different from the benchmark for that portfolio. Active Share of 60%–70% can have a tracking error. anywhere from under 4% to over 14%. In other. words, the distribution is wide enough that we can. meaningfully distinguish between different active. management styles on the basis of the two measures. Your portfolio is benchmarked against the S&P 500 Index, and you have invested the whole portfolio in one stock, which has the ticker symbol “SPY.” SPY is not included in the S&P 500, so the active-share definition would suggest your active share is 100: That is, you have no holdings in common with your benchmark. Fund has a relatively high tracking error of 9.7%. and a low Active Share of 66%, reflecting the sector. bets of the fund as well as its decision to allocate to. cash during the financial crisis. The upper right-hand corner includes con-. centrated stock pickers that combine active stock. selection with factor bets. Measurement is important because active share is well on its way to becoming a central element of managers’ sales efforts and of clients’ portfolio analytics. The reality, however, is that active share is a fuzzy number, open both to inadvertent errors and to manipulative techniques. Active Share is simply the percentage of the fund’s. portfolio that differs from the fund’s benchmark. index. For an all-equity mutual fund that has no. leveraged or short positions, the Active Share of the. fund will always be between 0% and 100%. Hence, Active Share and tracking error empha-. size different aspects of active management. Active. Share is a reasonable proxy for stock selection, whereas tracking error is a proxy for systematic fac-. tor risk. 4. Choice of benchmark: Because active share is by definition calculated relative to a benchmark, using an inappropriate benchmark is a quick way of boosting active share. Detection may not always be easy. Funds with high active share scores outperform by so much that they even tend to overcome the bad effects of high expenses in the cases of funds that are burdened by them.Of course, funds with high active share scores aren't for everyone, and high active share isn't a blanket guarantee of good absolute performance. Using Active Share and tracking error, the author sorted all-equity mutual funds into various categories. of active management. The most active stock pickers outperformed their benchmark indices even after fees, whereas closet indexers underperformed.
The proportion of a portfolio’s holdings that is different from the benchmark for that portfolio.