Six years ago two researchers, Martijn Cremers and Antti Petajisto, devised a model to assess just how 'active' a supposedly 'active fund manager' actually is. They shone a light on the ludicrous (even scandalous) issue of those fund managers that charge high fees for not doing much, and run portfolios that deliberately hug their benchmarks.
The model was called Active Share, which is a simple percentage proportion of a fund that is different from its benchmark index. In other words, its the fraction of a fund that is being 'actively' managed. What was so exceptional about the findings was that funds with the highest Active Share significantly and consistently outperformed their benchmarks (the research is here).
This was obviously welcomed with open arms by genuinely active managers, and Active Share has become a popular measure in the industry. But the nagging problem for managed funds is that, regardless of Active Share, most still struggle to produce anything like consistent outperformance. For this reason, passive funds (which by definition, are generally low Active Share) have become very popular.
This week, there was a new twist in the tale with a paper from US fund firm AQR Capital. It re-crunched the same data and questioned some of the original Active Share conclusions. In particular, AQR's research - which you can find here - found that there had been a considerable skew to small-cap benchmarks (and that the small-firm effect was having a very big influence on the results). After controlling for benchmarks, AQR concluded that there was no clear connection between more-active managers and higher performance.
Cremers and Petajisto have disputed some of AQR's conclusions, and claim that the new results actually support some of what they said. There is a great analysis of all this by John Authers in the FT here.
Perhaps the most important point to come out of the debate - and something both sides agree on - is that fees matter: “If you if you deliver index-like returns, you should charge index-fund-like fees." No one should be arguing with that.
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