The reason why it is deemed to be so important is because active share measures of how different the portfolio is from its benchmark – 0 per cent means it’s exactly the same as the index, 100 per cent is completely different – and therefore gives investors greater transparency in active their manager really is.
The likes of Premier’s Simon Evan-Cook have told FE Trustnet in the past that it adds a new dimension to the active versus passive debate, as it shows which funds are justifying their often higher ongoing charges by doing something different to the benchmark and which funds are effectively “closet-trackers”.
He describes the latter, those with a lower active share, as the real enemy for both passive and active fund enthusiasts.
“Critics of active investing have long maintained it is too hard to pick a good active fund. But this shows how easy it is to immediately avoid most of the weaker funds that drag down the ‘average fund’ statistics,” Evan-Cook (pictured) said.
“Naturally there is more to it than that, but we did this with one simple measure: active share.”
“Unfortunately, active share is not widely used by the industry yet and it is certainly not understood by the investing public. We hope this will change.”
Things certainly do seem to be changing. In recent weeks, Neptune Investment Management, Majedie and Threadneedle Investments have stepped forward to publish their funds’ active share.
Robin Geffen, chief executive officer at Neptune, said: “We are proud of the extent to which our performance over the past decade has been driven by taking high-conviction positions in companies.”
“My challenge is to other asset managers to follow suit and publish end of year figures so that investors can compare active funds like for like.”
Woodford Investment Management is the next group to join in.
In its most recent note to investors, the group highlighted that FE Alpha Manager Neil Woodford’s CF Woodford Equity Income fund – which has topped the IA UK Equity Income sector and comfortably beaten the FTSE All Share since its launch in June last year – currently has an active share of 81.37 per cent.
Performance of fund versus sector and index since June 2014
Source: FE Analytics
The star manager has also said in the past that managers who describe themselves as ‘active’ are often too constrained to make genuine stock bets which aren’t in line with the index.
“The tyranny of the benchmark has created an environment where fund managers are less inclined to back businesses or industries for the long term because they are concerned with the career risk of moving too far away from their benchmark index over shorter time periods,” Woodford (pictured) wrote in the Kay Review in 2012.
There is certainly a clamour within the investor community for more groups to publish active share, as a study conducted by Harrington Cooper showed that 92 per cent of wealth managers and multi-managers look for funds with a high active share as part of their selection process.
Harry Dickinson, managing partner at Harrington Cooper, also points out that managers who are willing to take a high active share have the ability to significantly outperform their respective index.
“Fund managers are looking for new sources of alpha to protect their funds against challenging economic conditions,” Dickinson said.
“We find that high conviction managers displaying high active share often deliver the best results. These funds tend not only to provide stronger returns over time for investors but critically, help to diversify portfolios away from index returns, protecting against turbulent market conditions.”
However, there is an obvious issue with purely focusing on a fund’s active share as while a high conviction manager has the ability to significantly outperform, by the same reckoning they could also significantly underperform the index.
Therefore, if investors based their investment decisions on the metric alone, they could end up with a fund they really didn’t want to own.
One fund which comes under a lot of criticism by regular FE Trustnet commenters is Manek Growth, which was launched by Jayesh Manek in 1997, who had shot into the limelight as winner of The Sunday Times Fantasy Fund Manager competitions in 1994 and 1995.
The now £15m fund, which has lost 71 per cent over 15 years while its FTSE All Share benchmark has is up 101.74 per cent, has a very active share of 97 per cent.
Performance of fund versus sector and index over 15yrs
Source: FE Analytics
Star manager Francis Brooke, who heads up the five crown-rated Trojan Income fund, recently flagged up the issue as he told FE Trustnet that an over-reliance on finding managers with the highest active share could lead investors down a dangerous route.
“I think in some instances, active share can be a bit of a trap,” he said. “Two funds with the same high active share could give investors very different outcomes. It’s not a silver bullet.”
“If you’re saying that you should only invest in active managers with a high active share – and it’s increasingly feeling that way – I think you are encouraging investors to take on a lot more risk. You’ve got to temper this with other factors, otherwise it’s a real danger.”
Rob Harris, chief executive officer at Majedie, also highlighted this point as he says the focus on active share, and the belief that fund managers should aspire to have a high active share, is misguided.
“We believe active share to be an informative but relatively crude metric - like so many other similar portfolio analysis tools. High active share scores should absolutely not be used in isolation to justify high active fees.”
He added: “There really are no short cuts to investment success, nor indeed to manager selection.”
Nevertheless, this doesn’t mean that groups shouldn’t publish their fund’s active share as, at the end of the day, it helps – along with a number of other metrics – to give an investor a far greater understanding of what type of fund they are buying.
We at FE Trustnet are very keen to see greater transparency within the fund management industry. One of our most recent campaigns, for example, was to get more groups to publish their funds’ dividend histories rather just disclosing the yield.
A number of groups have already responded and published their fund’s dividend histories, such as Troy and Miton, and it is campaign we will be rebooting over the next couple of weeks.
Like with the push to generate greater transparency in income, Simon Evan-Cook applauds groups for disclosing active share but says investors shouldn’t obsess over it.
“I completely agree with the likes of Majedie as active share that should be on a factsheet like its yield, but it isn’t something you should base your investment decision on,” he said.
