Tuesday, 10 June 2014 - 20:00
Seed Weekly - Active Share
Active share has emerged as a new metric to assess active managers. The metric focuses on how individual stock weights in a portfolio differ from the weights in a benchmark, providing an enhancement over traditional measures such as tracking error. Simply said, active share is the fund’s percentage that is different from its benchmark. By looking at the active share you can determine if the manager is doing active stock selection or secretly hugging the benchmark.
Active share is calculated by summing the absolute difference between a stocks weight in the portfolio and the index and then halving the value and ranges from 0% (100% overlap with benchmark) to 100% (zero overlap with benchmark).
The chart below shows the stock selection of two funds and the index (benchmark) weight of the stocks.
From the chart we can see that Fund 1 is much more active in stock selection and weighting compared to Fund 2. Fund 2 is an example of closet indexer or benchmark hugger. Practically, Fund 1 has an active share of 60% and Fund 2 has an active share of only 10%.
A closet indexer is an ‘active’ manager that only takes small relative positions when compared to the index that is used as the benchmark. The returns of these funds will, gross of fees, typically be similar to that of the benchmark, but below the benchmark after fees are deducted. These managers tend to shy away from making high conviction investments which would differentiate them too far from the benchmark.
Bank Credit Analyst (BCA) looked at the active share of all equity unit trusts in the US over the last 34 years. The funds were grouped into bands by active share. They discovered that, over time, there has been an increase in funds that are closet indexers.
To get returns different to the index, a fund needs to be positioned differently to the index. The research done by BCA showed funds that outperformed the index also had a high active share.
BCA also took a look at the relation between active share, fund size and outperformance. The chart below shows the relative performance of funds broken up into fund size and active share.
From the chart we can see that small active funds had, on average, the highest outperformance. The chart also interestingly shows that fund size doesn’t have a material impact on relative performance, but that active share is a more valuable measure of whether there will be outperformance. Naturally, as a fund gets larger it becomes more difficult to retain a high active share.
While active share is very useful, it is simply another tool that should be added to an investor's toolbox for use in evaluating investment portfolios (unit trusts, segregated accounts, pension funds, etc). As the research becomes more widespread we expect that more emphasis will be placed on active share, making it more accessible for the average investor. It is currently very difficult for the average investor to calculate active share for a range of local equity managers. The key take out is that funds that are closely aligned to an index will struggle to outperform after costs.
Due to the concentrated nature of the local market we expect that South African funds will have a lower active share when compared to global funds. Globally, active share should be above 80% for a fund to be considered ‘active’, locally we expect it to be above 70%. At Seed, when allocating client investment to an active manager, our preference is for an active share consistently in excess of 75%.
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Tue, 10 Jun 2014
European stocks inched up on
Tuesday, extending a three-week rally, led by gains in defensive
Swiss blue-chips such as pharma group Novartis and
food. . .
Britain's top stock index
recovered in late trading on Tuesday to end flat, with a surge
in SABMiller on merger talks offset by. . .
U.S. stocks advanced on Monday,
boosted by a number of major acquisition deals, though gains
were slight with key indexes continuing to hover. . .
A worldwide measure of stocks
dipped on Tuesday but was within reach of its record high, while
U.S. Treasury yields touched one month. . .
World Markets (Spot Prices)
|JSE Top 40||17:00||45730.62||593.55||1.31%|
|JSE Indust 25||17:00||59574.20||1269.34||2.18%|
|Rand / Dollar||19:59||10.7236||0.0925||0.87%|
|Rand / Pound||19:55||17.9252||0.0881||0.49%|
|Rand / Euro||19:55||14.5173||0.0614||0.42%|
|Rand / NZD||19:59||9.1304||0.0980||1.08%|
|Rand / AUD||19:55||10.0445||0.0981||0.99%|
|Yen / Dollar||19:59||102.3780||-0.1540||-0.15%|
|Euro / Dollar||19:59||0.7387||0.0056||0.76%|
|Dollar / Euro||19:59||1.3536||-0.0056||-0.41%|
|Pound / Dollar||19:55||0.5969||0.0020||0.34%|
Click here for the Sharenet Spot Price page
The JSE Today
* Includes all listed instruments on the JSE
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||63,412.01||1206.14||1.94%|
|Oil & Gas ||46,506.56||584.21||1.27%|
|Oil & Gas Producers ||25,005.72||314.12||1.27%|
|Basic Materials ||29,305.85||-118.77||-0.40%|
|Forestry & Paper ||33,217.35||-239.48||-0.72%|
|Industrial Metals ||18,929.49||179.27||0.96%|
|General Industrials ||145.10||1.56||1.09%|
|Consumer Goods ||63,230.20||1475.11||2.39%|
|Automobiles & Parts ||9,408.83||217.39||2.37%|
|Health Care ||82,999.54||1148.86||1.40%|
|Index Name||RP||Move||% Move|
|Food Producers ||76,863.05||1436.23||1.90%|
|Personal Goods ||1,094.84||.40||0.04%|
|Consumer Services ||11,985.36||294.56||2.52%|
|General Retailers ||64,748.63||556.33||0.87%|
|Travel & Leisure ||5,831.25||-37.86||-0.65%|
|Support Services ||2,897.18||25.89||0.90%|
|Non-life Insurance ||51,940.24||-635.51||-1.21%|
|Life Insurance ||35,913.67||22.04||0.06%|
|General Financial ||3,771.22||57.52||1.55%|
|SHARIAH TOP40 ||4,242.87||17||0.41%|
|FTSE/JSE SHARIAH ALL||4,360.94||20||0.46%|
|FTSE JSE Fledgling ||6,707.94||-34||-0.50%|
|FTSE/JSE Alt X ||1,285.74||-7||-0.55%|
|SA LISTED PROPERTY ||506.43||-0.30%|
|CAPPED PROPERTY ||448.55||-0.24%|
|FTSE/JSE RAFI 40||10,041.09||105||1.06%|
|Capped Top 40||24,248.50||331||1.38%|
|Capped All Share||25,702.77||310||1.22%|
|JSE TABACO ||8,109.07||37||0.46%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|LEW||LEWIS GROUP LIMITED||HOLD||06/06/2014|
|EXX||EXXARO RESOURCES LIMITED||HOLD||05/06/2014|
|Expected||Company Name||Fin. Date|
|11/06/2014||INVICTA||March 2014 (Final)|
|11/06/2014||IVT PREF||March 2014 (Final)|
|11/06/2014||PERGRIN||March 2014 (Final)|
|11/06/2014||PERGRINP||March 2014 (Final)|
|12/06/2014||ACUCAP||March 2014 (Final)|
|IVT PREF||05/06/14||20/06/14||30/06/14||ZAR 5.3372|
|JDG CONV||19/05/14||06/06/14||20/06/14||ZAR 375.0000|
|ABIL PREF||19/05/14||06/06/14||17/06/14||ZAR 3.4900|
|SGL||Sibanye Gold Ltd.||17/06/2014||Confirmed||
Stock Exchange News Service
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