Value of 'active share' measurement questioned

Criticism of "active share" as a tool to identify lazy fund managers has intensified following a surge in investor demand for asset management groups to disclose how active their funds really are.

Melissa Brown, senior director of applied research at Axioma, a risk analysis company, said investor hype over "active share" - a measure of how much a fund diverges from its benchmark - is misguided.

Ms Brown particularly criticised the pressure on fund managers to achieve an active share of at least 60 per cent. This figure, which has won wide acceptance as the minimum level an actively managed fund should differ from its underlying index, stems from a 2009 academic paper that first proposed the active share concept.

She said: "It seems to me that 60 per cent was arbitrarily chosen and quite high. [A fund's active share] is very dependent on the benchmark and on the process of generating the expected excess returns."

Ms Brown added that the data used in the 2009 paper was of "questionable completeness". This is because the analysis was based on the quarterly holdings reports filed by US asset managers, which probably excluded short positions.

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He said: "A high active share is no guarantee a fund will outperform, as simply being different from the index is not enough to beat it. Evaluating funds based solely on active share and tracking error can lead to inaccurate conclusions with regards to 'closet index' funds."

Ms Brown did not reject the usefulness of the active share metric entirely, but called for it to be used in conjunction with tracking error and more context.

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