Some 81% of delegates from across Europe attending EIE’s 3-day conference say they find the so-called active share of a fund an important metric in their selection process. Active share is the extent to which a fund’s positions deviate from the benchmark or, more precisely, the percentage of holdings in a manager’s portfolio which differs from the benchmark.
Many fund selectors see active share as a sort of guarantee of active management, in an investment 
environment where alleged ‘closet-trackers’, funds which charge fees for active management but in practice deviate very little from the benchmark, are under increased scrutiny. “I’m prepared to pay a higher fee for a fund which can show me a record of consistently high active share,” says for example Marcel de Kleer, a fund analyst for Wealth Management Partners in Amsterdam.
The wrong incentive?
But should active share really be considered the new standard for judging active managers? One should not automatically assume that funds with a high active share tend to outperform their less active peers, warns Jeroen Vetter, a fund consultant from the Netherlands. “It really depends on the market. Even managers with high active share do in general not succeed in outperforming the S&P 500, because it is such a broad index. In a market like the UK, with a few dominant sectors such as banking and commodities, very active managers have better chances to outperform,”, he says.
Arild Orgland (photo), managing partner of Industrifinans, a wealth management company based in Oslo, even 
completely denounces the importance many of his industry peers attach to active share. “In my view a manager should construct a portfolio of the stocks with the highest risk-adjusted expected return, regardless of how close the resulting portfolio resembles the index or not.”
Moreover, fund selectors emphasising active share can have serious implications for fund management, as fund managers would be tempted to have a high active share to appeal to fund buyers. “This could result in a fund manager being paralised by not being able or willing to buy stocks with a large weight in the index, even if they have the highest expected return”, Orgland says.
