Touchstone views high active share and manager conviction, not as a harbinger of definite outperformance, but as indicators that a mutual fund strategy may have the opportunity to outperform its benchmark. In this context, active share can be a valuable aspect of investment manager evaluation and mutual fund analysis.
Differentiated Approaches With Active Share
Touchstone seeks strategies that have the potential to provide excess returns and complement most portfolios. We expect each fund’s sub-advisor to demonstrate a consistent and repeatable investment process. Expectations are reconciled against actual portfolio characteristics, holdings and transactions, using various investment-specific metrics, including Active Share, to monitor consistency of process and benchmark differentiation.
A commonality spans most of Touchstone equity funds. Each sub-advisor’s deep fundamental investment process has led them to a portfolio of securities in which they hold great conviction. Their portfolios tend to be more concentrated and are generally different from their respective benchmark. We believe these characteristics are desirable and broadly representative of Touchstone’s equity funds.
One measure of benchmark agnosticism is Active Share, which is a measure of the fraction of a fund’s portfolio (based on position weights) that differs from the benchmark index. Active Share is more than a number. Active Share can be a valuable element of investment manager evaluation and fund analysis.
Measuring Active Share
Active Share basically measures how different a fund is from the benchmark. If the securities and sector weights of the fund’s portfolios are 100 percent like the benchmark, the fund would be deemed to have zero percent Active Share.
Active share is not a measure of skill, rather it measures how different fund holdings are relative to the holdings of their named benchmark. Advocates claim any difference in performance between fund and named benchmark (index) can only come from fund positions that are different from the benchmark.
Active share is the percentage of fund holdings that is different from the benchmark holdings. Active share can most easily be calculated as 100 percent minus the sum of the overlapping portfolio weights.
Research has shown that as a group and over fairly long periods of time that funds with low active share may tend to underperform their benchmarks net of costs; funds with high active share may tend to outperform their benchmarks net of costs, especially among funds that do not trade frequently, among small cap funds and among funds that do not have very large assets under management.
What is Active Share
Active Share is the proportion of fund holdings that is different or active. Professor Martijn Cremers talks about Active Share.
Professor Martijn Cremers talks about Active Share
What is Active Share?
Active Share is a holdings-based measure of active management that is based on how different the holdings of a fund are relative to the holdings of the fund’s benchmark.
Specifically, Active Share is the proportion of fund holdings that is different or active; it is equal to 100% minus the sum of the overlapping portfolio weights between the fund and its benchmark. The Active Share number indicates how large the over- and underweights are relative to the total assets in the fund.
If a fund has a low Active Share (below 60 percent), its holdings are similar to the benchmark holdings. If a fund has a high Active Share (above 80 percent for large cap funds and above 90 percent for small cap funds), the fund has little overlap with its benchmark and is attempting to truly provide investors with a different portfolio and better return than the benchmark.
Why is it important?
Active Share can serve as an important tool to find truly actively managed mutual funds. In order to outperform a benchmark, the fund needs to be different than the benchmark. In my studies, we discovered a positive relationship between fund performance and the fund manager’s willingness to be different as managers by active share.
Martijn Cremers and Antti Petajisto, March 2009, How Active Is Your Fund Manager? A New Measure That Predicts Performance, Review of Financial Studies, Yale School of Management
We also examined whether Active Share had any bearing on the relative performance of U.S. equity mutual funds and found that historically, funds with the highest Active Share outperformed their benchmarks, both before and after expenses, and exhibited strong performance persistence as well.
Touchstone Securities, Inc., has partnered with Professor Martijn Cremers to provide consulting services. Touchstone and Professor Martijn Cremers are independent of each other.
“Active share is not a performance measurement. There are no assurances that any strategy or investment approach will meet its objectives. This information should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Past performance is not indicative of future results. Securities offered through Touchstone Securities, Inc. member FINRA/SIPC.”
This material is offered by Touchstone in affiliation with Professor Martijn Cremers. Touchstone Securities, Inc. is independent of Martijn Cremers.
Active Share measures the percentage of the Fund's holdings that differ from those of the benchmark. It is calculated by taking the sum of the absolute difference between all of the holdings and weights in the portfolio and those of the benchmark holdings and weights and dividing the result by two. Index performance is not indicative of fund performance. Investing in an index is not possible. Active Share is not a performance measurement. There are no assurances that any strategy or investment approach will meet its objectives. This information should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Past performance is not indicative of future results.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the fund. To obtain a prospectus or a summary prospectus, contact your financial advisor or download and/or request one at Resources & Tools. Please read the prospectus and/or summary prospectus carefully before investing.
Investment return and principal value of an investment in a Fund will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
Touchstone Funds are distributed by Touchstone Securities, Inc., a registered broker-dealer and member FINRA/SIPC
Investment products offered are not FDIC insured, may lose value and have no bank guarantee.
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