The search for performance never stops, and any tool or metric that offers a reasonable chance at generating alpha is worth considering.
Active share, a fairly new metric for analyzing mutual funds' portfolios, has received a good deal of attention lately. Although some researchers are skeptical about the measure's value, others believe it provides useful information for investors.
Active share calculates how a fund's holdings compare to the positions in its benchmark index; its value is measured on a scale from zero to 100%.
A low share value indicates that a fund is closely tracking its index. For example, an S&P 500 Index fund would have a value very close to or equal to zero. That makes sense: It's a passively managed fund designed to track the index as closely as possible, so there's little or no deviation in holdings.
In contrast, a fund with a high active share of 80%, for instance, is considered actively managed, because its holdings will differ significantly from the index.
The scale for measuring active share uses the following ranges, according to Touchstone Investments:
| Active share range | Interpretation |
| 0%-20% | Passive |
| 20%-60% | Closet index |
| 60%-100% | Active |
Background
The active share measure started drawing attention in several years ago.
A study by finance experts Antti Petajisto and Martijn Cremers, for instance, analyzed fund performances from 1990 to 2003. They concluded that high active share funds outperformed their benchmarks before and after fees, that active share was persistent, and that it is an indicator of future alpha.
Another key finding that won't surprise advisors is that closet indexers underperform benchmarks, after fees and transaction costs. Again, that makes sense: Passive low-cost index funds will have an advantage over managed closet index funds that incur higher costs.
Subsequent research has both supported and challenged the original findings on the value of active share.
