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Active Share & Mutual Fund Performance
Old 12-09-2010, 06:30 AM   #1
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Active Share & Mutual Fund Performance

SSRN-Active Share and Mutual Fund Performance by Antti Petajisto

I sort domestic all-equity mutual funds into different categories of active management using Active Share and tracking error, as suggested by Cremers and Petajisto (2009). I find that over my sample period until the end of 2009, the most active stock pickers have outperformed their benchmark indices even after fees and transaction costs. In contrast, closet indexers or funds focusing on factor bets have lost to their benchmarks after fees. The same long-term performance patterns held up over the 2008-2009 financial crisis. Closet indexing has become more popular after market volatility started to increase in 2007.

"It's tough to make predictions, especially when it involves the future." ~Attributed to many
"In theory, there is no difference between theory and practice. But, in practice, there is." ~(perhaps by) Yogi Berra
"Those who have knowledge, don't predict. Those who predict, don't have knowledge."~ Lau tzu
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Old 12-09-2010, 11:40 AM   #2
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Morningstar discussed this, but I haven't seen any active share numbers for specific funds. Also interesting that "factors" based funds did not provide any advantages. Although they were described in the paper as placing bets on macro trends, it looks more like they were simply most of the high-standard deviation funds.

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Old 12-09-2010, 01:51 PM   #3
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Wow, just googled "active share" to see if I could find any specific fund data. My 11:40 am post above was in the search results already, on page 3.
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Old 12-09-2010, 01:52 PM   #4
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Interesting article that confirms some sacred cows ("most active mgrs underperform the index") but questions some others ("you can't predict which active mgrs will outperform").

One big takeaway is, Avoid closet index funds at all costs. That won't be news to most people here, I think. I wonder when/if the active-share numbers for existing mutual funds will be published?

Personally I'll stick with passive mgmt wherever possible, especially in liquid markets. Even with the slight theoretical advantage that the paper assigns to high active-share funds, I still can't stomach a stock-picker in charge of my investments.

BTW, did anyone notice how far back the author tested? I couldn't find the dates that bounded his data.
And if I claim to be a wise man, it surely means that I don't know.
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Old 12-09-2010, 02:05 PM   #5
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Here's the original M* article:
Morningstar Free Smartpage | News

(there's a small table of large-cap growth fund active share numbers on the second page)

Here's a little follow-up table of large-cap analyst picks active share numbers:
Know Your Portfolio

(that's probably a Premium ($) article)
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