Many investors are wary that active fund management fee lose high for low-rate liabilities funds. However, there is a group of funds that consistently have higher long-term returns (though not in every year). After all, what are the characteristics that distinguish them? this line, We would like to share with our investors a concept that has gradually been introduced into the world of resource management - Active Share.
The manager is active? One of the evaluation metrics is the Active Share
Active Share is not a measure of performance, but a measure of degree of activity manager. It has a simple mathematical expression and powerful, whose formula is:
At where i It is the i-th share of the fund portfolio or benchmark.
In other words, Active Share is the sum of the differences between the weight of a stock in the background and the weight of the same stock in the index (for example, Ibovespa and IBX).
When the Active Share a fund for 0%, this is totally passive, because your wallet is exactly identical to the index. Analogously, if a fund has Active Share of 100%, this has a totally different portfolio index.
Faced with this simple formula, we can already draw some findings:
- The lower the Active Share a fund, plus the manager will have to be skilled to generate returns, because he has to be extremely "accurate" in the small plot he has outside the index;
- If the manager is positioned as an asset manager, but has low Active Share, Pay Close Attention - it is charging active management fee and delivering passive management! (or the popular "selling salmon and sardines delivering")
Ah, just do not forget to, those that charge as an asset, but that has passive management, They were affectionately nicknamed "closet indexers", we will tropicalize as "pseudo-active".
And other valuation measures of investment funds?
One of the most hallowed measures of activity is Tracking Error, measuring the standard deviation of the difference between profitability and background benchmark. It is an indicator ex-post, as it uses history to its calculation.
That is, while Active Share does not need history, comparing a "snapshot" of the fund portfolio versus the index portfolio, Tracking Error uses the background history and its benchmark, measuring how much the result deviates from the benchmark.
In his article, Cremers and Petajisto (2009, p. 3331) It proposes a joint assessment Active Share and Tracking Error to evaluate the style of your background:
|Active Share||Tracking Error||Style|
|High||Low||Stock picking – diversified portfolio|
|High||High||Stock picking - Concentrated Portfolio|
Now, sure you are asking the question: There is a rule for the profitability of each of these groups?
The only consensus is that the group of "Pseudo-Assets" shows the worst performance of all, both in the short and long term, consistently delivering returns below the index, therefore they charge high rates and is similar to indexed portfolio. In the study of the US market, pseudo-active have been defined as those who have Active between Share 20% a 60%.
In groups of high Active Share, although the results dispersion, there are also funds that consistently have above benchmark results. That is, high Active Share is a necessary condition, but not sufficient for good performance.
currently, not only many US fund managers present their Active Share in their promotional materials, as well as several investors use it as one of the criteria in the selection of funds. But, do not forget, a fund with performance above the index necessarily have high Active Share, but a high Active Share does not guarantee a performance above the index! For the fund to be good even, many other attributes are needed. It is important to assess whether the portfolio is very concentrated, exposing themselves to many specific risks; also take into account whether the portfolio is mainly composed of Small-Cap, which naturally leads to divert the most commonly used indices such as Ibovespa and IBX. The most important is to build a rational with multiple points that are consistent and make economic sense.