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New York Attorney General Eric Schneiderman Copyright Eduardo Munoz Alvarez, Getty Images
New York Attorney General Eric Schneiderman

Some Warn Against Relying on “Active Share” to Gauge a Fund’s Value

The New York Attorney General’s office has championed “Active Share” as a metric for investors to understand what value they’re getting out of their investment fund, but many in the industry, including the academic who invented it, warn the number can lead investors to some wrong conclusions.

New York Attorney General Eric Schneiderman announced last week that thanks to his office’s investigation 13 mutual fund firms, including Vanguard, BlackRock and T. Rowe Price, have agreed to voluntarily publish for retail investors the “Active Share” metric for all of their mutual funds.

The attorney general’s office championed the new transparency in a report and said that retail investors now had access to information on funds that was previously reserved for institutional and professional investors. Publishing the Active Share—the percentage of stock holdings in a fund’s portfolio that differs from its benchmark index—would “help retail investors determine whether a higher-cost, actively managed mutual fund fits their investment goals better than another, lower-cost alternative,” the office said in a statement.

Some of those closest to actively managed funds, as well as the academic who defined the term, praised the transparency, but they also cautioned against relying too heavily on the metric as a means to protect investors from unscrupulous or ineffective managers of high-cost funds.

While it may help accomplish that goal, there are other factors that need to be equally applied to put the fund in proper context. Simply looking at low active share may cause an investor to think their manager is relying too heavily on a benchmark, and thus not earning their fees, when in fact the small percentage of equities identified by the manager that differ from the index can in some cases lead to returns that far outperform. In other words, low Active Share doesn’t always translate into index-like returns.   

Aaron Pottichen, president of CLS Partners Retirement Services, said his firm is in favor of anything that gives more transparency to investors and that Active Share will shed light on so-called “closet benchmark” managers charging a high fee for effectively replicating an index. But he doesn’t think Active Share, as a measurement on its own, is a solution for retail investors.

“This version, while good, is probably three years away from anything worthwhile for the investing public to use,” Pottichen said.

Others agree with Pottichen, including Martijn Cremers, finance professor at the University of Notre Dame whose paper “How active is your fund manager? A new measure that predicts performance” introduced Active Share as a measurement in 2009.

“Active share is a very basic tool to analyze an investment fund and more transparency, I certainly think, that’s helpful,” Cremers said. “But I also agree that you need to carefully consider Active Share and use it with other things.”

Cremers maintains a website,, where anyone can search the name or ticker of a U.S. equity mutual fund and view its Active Share and related data. He plans to update the website this spring with new company data, filters for certain fund characteristics and, ultimately, would like it to be more user-friendly. Still, it was designed for sophisticated financial advisors in mind, he said.

“We can add more [information] but it assumes that the person using it understands all of these things,” he said.

Cremers added that he’s also working on a paper with methodology to help determine how appropriate an equity mutual fund’s benchmark index is versus others, which could be telling when it comes to their performance.

“We in the industry have been, for years, engaged in a debate of active versus passive because, honestly, active management is not homogeneous,” said Steve Graziano, president of Touchstone Investments, a sub-advisory firm that selects active managers.

A long list of factors, Graziano said, should be considered alongside a fund’s Active Share; he argued the number of equities a fund holds could be telling of how active managers really are and about their conviction in the investments they choose. He was critical of funds with hundreds of different equities in portfolios that claimed to be active and questioned the confidence the managers have in their selection.

He and Cremers also said an active fund manager should be judged based on his or her performance over different time periods, through market cycles and, perhaps above all else, “wealth creation” for investors. It’s possible that over the course of managing a fund, the Active Share will fluctuate and that isn’t an indicator of whether a retail investor should or shouldn’t invest in it.

“If [Active Share] is the only thing an investor has, it could be misused,” Graziano said. “We think it’s a first step.”

Neither Schneiderman nor anyone who worked on the report in the New York Attorney General’s office was available to comment for this story.

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