The growing focus on active share as a singular reliable guide for future fund outperformance could be detrimental for investors, according to a new white paper published by Hermes Investment Management.
Looks like a lion, manages like a lamb, which explores a body of academic research, has found that the use of a single portfolio attribute – such as active share – does not give a complete picture of a fund’s ability to generate excess returns over a benchmark.
The paper also reveals that simply identifying the correct investment opportunities is not enough for managers to deliver outperformance. This skill must be allied with strengths in other areas of portfolio construction, such as ensuring the size of individual positions is commensurate with the level of risk taken.
Key findings on active share:
- A high active share portfolio picked by an unskilled manager is more likely to significantly underperform
- A top-heavy index will necessitate muted active share
- Single index portfolios may naturally find it harder to generate a high active share
- Active share is not associated with any consideration of portfolio risk
The paper also addresses a number of key questions about how applicable active share really is in modern portfolio management:
- Do funds with the highest active share really outperform benchmarks?
- Does outperformance hold up even after the inclusion of fees and transaction costs?
- How does this contrast funds with the lower active share?