How hard do you work? If you asked most people they’d undoubtedly reply “very”. Noone wants to admit to being a slacker.
What if you didn’t believe them and, rather than asking the individual questions, you tested just how hard they were working. But instead of carrying out a thorough analysis of what they do, how productive they are, how much they work, the environment in which they work and how good they are at their job, you subjected them to one simple test that tells you exactly how hard they work. And then you fired them if they weren’t performing.
It seems a little harsh and cutthroat. But that’s exactly the danger that some investors run into when using a blunt tool such as ‘active share’ to make portfolio decisions.
Active share aims to measure in a simple way how hard an active fund manager is working by determining how much they deviate from their benchmark. It measures the level to which they index hug, in a bid to weed out closet trackers. It’s a great goal, as closet tracker managers that follow an index and charge a 0.75 per cent fee for the pleasure of doing so are the scourge of the industry.
But, as with many tests, it just shows one part of the picture, and so should not be relied upon to the exclusion of other factors.
Our cover story this month looks at the issue of active share, how effective it can be and how it stacks up against other measures, such as tracking error.
The feature also looks at the handful of asset managers have backed the active share measure, pledging to publish it on factsheets for all their funds in a bid to guide investors. This level of transparency in the industry should be applauded, but experts warn that the figure must be used with some caution and scepticism.
We continue looking at the topic of active share in Behind the Numbers where we look at some clear examples, comparing two funds with the same active share but very different results.
The piece highlights how tricky using just one measure can be.