At the height of the recent stampede by investment houses to proclaim their complete ambivalence towards anything remotely resembling a benchmark index, there came a point when it all began to feel a bit like the scene near the end of Life of Brian. “I’m active share!” “I’m active share!” “I’m active share and so’s my wife.”
Regular readers of this column, should they exist, could be forgiven for wondering what took everyone so long. We addressed the topic back in 2012, concluding with Michael Mauboussin’s exhortation: “If you’re going to be active, go active. Don’t own a fund with low active share because the chances are good the fund’s gross returns will be insufficient to leave you with attractive returns after fees.”
Still, before I grow too smug, I do owe anyone who actually read my piece an apology. At the time, I assumed this was rather too obvious to spell out but, having seen some of the more recent and breathless coverage of the subject in the press, I clearly should have added, for the avoidance of all possible doubt, that a high active share number is not a virtue in and of itself.
After all, my cat could put together a portfolio of shares that looked nothing like her benchmark index but I doubt any PI readers would be beating a path to her spot on my sofa to hand over their cash. No, obviously – or so I used to think – investors will only really benefit from a high active share if the fund it relates to is run by a skilful stockpicker.
Sorry I did not make that clear. To make it up you, I will flag up an academic paper called Patient capital outperformance, which was published last autumn. Co-authored by finance professors Martijn Cremers (who originally defined active share with Antti Petajisto) and Ankur Pareek, it takes things on a step further by adding into the mix the ingredient of time.
To cut a 72-page paper short, the pair’s analysis of US institutional and mutual fund data going back several decades – and I concede, even here in retail world, one would ideally prefer more – indicated that a high active share and a longer timeframe will play a significant part in achieving strong investment performance.
Contrarianism and patience then – surely two qualities to which most investors might reasonably aspire. And in the spirit of the former, I will finish with another illustration of why active share should not unthinkingly be taken as an absolute virtue – for how is it supposed to work when the shares standing on the most attractive valuations are the very biggest players in your benchmark?
Despite what the UK market currently appears to believe, for example, there will presumably come a time when miners look attractive. Will some managers then ignore them just to maintain their active share? That would seem wrong or, as the man once sang: “Some things in life are bad, they can really make you mad …”
Julian Marr is editorial director of Adviser-Hub and co-author of ‘Investing in emerging markets – the BRIC economies and beyond’
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