Coined by academics Martijn Cremers and Antti Petajisto in 2009, active share is a well-established yardstick in the world of equity investing. Beyond funds of stocks and shares, however, this measure is yet to be applied more broadly, enabling closet trackers to remain under the radar in areas such as high-yield credit. In the decade since its introduction, active share has earned its seat at the table alongside tracking error, volatility and the information ratio, which in concert help to identify the extent to which active fees are being put to work.
Active share measures how much a portfolio of stocks differs from a benchmark, empirically distinguishing how active a manager really is. The measure ranges from zero to 100%, with zero considered to be equivalent to a passive or index-tracking fund, while 100% is a totally active fund, in which all positions differ from those in the benchmark. Messrs. Cremers and Petajisto concluded that an actively managed fund's active share typically falls within the 60% to 80% range. Active share is viewed as a good predictor of fund performance relative to the benchmark. Funds with the lowest active share tend to underperform their benchmarks, while those with the highest tend to outperform.
Beyond the measure's relative newness, a lack of transparent data, historically, has restricted the application of active share to other asset classes, such as high-yield credit, where track records tend to be much more limited relative to equities. Before passive high-yield credit funds were demanded by retail investors, high-yield managers were insulated from scrutiny of their active characteristics, but the proliferation of passive high-yield vehicles has provided a wealth of data, enabling the application of active share in a credit context.