Evaluating active managers and Active Share

They differ in style, strategy and how much risk they take. These differences also lead to differential investment performance. To understand how, and whether, active managers are genuinely adding value, investors need to break fund returns into underlying market performance, and returns generated as a result of investment manager skill.

Active Share is a risk measure that may help investors evaluate fund managers.

Active managers attempt to add value by deviating from benchmark indices. Active Share looks at the degree to which the investment holdings in an actively managed portfolio differ from those of a market index or performance benchmark. Active Share helps investors to understand and compare how much idiosyncratic risk is in a fund.

A low Active Share indicates that a fund manager is closely following an index, while a high Active Share indicates the fund manager is choosing investments that differ from the exposures in the fund’s benchmark. For example, a New Zealand equities fund that owns the same holdings, in the same proportions, as its S&P/NZX50 index benchmark would have an Active Share of 0%. A New Zealand equities fund that holds stocks that are completely different from those in the index would have an active share of 100%.