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The More 'Active' An Active Fund Is, The Better, Researcher Says
I agree, by the way. Getting active share data has been a damned iffy proposition; the only people willing to share the data are high AS managers and most of the academic stuff has been out-of-date by three years or more.
The most recent data on activeshare.info was a year old but I also thought it was nice that you could look at quarterly data and see how a fund's active share was changing, at least over a short period of 4 or 5 quarters. I think they also said, but maybe it was just in the article Ted linked, that active share tends to be persistent, especially in funds with lower turnover, so for those of us who prefer low turnover funds year old data hopefully isn't a big negative.
I've always thought that research can, at best, help us tilt the odds in our favor. High manager ownership and high trustee ownership guarantees nothing, but does tend toward a better risk-return relationship (trustees who are losing their very own money tend to slap underperforming managers around, who knew?). Small size relative to one's investable universe and processing capacity doesn't guarantee nimble performance, low turnover doesn't guarantee tax efficiency, high active share doesn't guarantee alpha ... but all of them should tilt things, at least incrementally, in our favor.
I would think Active Share is important IFF one wants to invest in Active fund. Active funds that closet the index are pointless. But, we already know that. At least I do, and I don't need research. Just common sense dictates it is senseless to try overcome additional expenses if active fund tracks your index.
While manager ownership guarantees nothing, to me this is a much more important criteria and often times ranks higher than expense ratio of an actively managed fund. I'm willing to cut slack to companies like Vanguard and TROW with strong cultures if there managers don't have any/substantial investment in their fund.
And of course for an index fund, it matters little if manager is invested.
The value added by active fund managers is always a controversial subject. There is no easy answer since most active managers fail, but a small fraction do succeed. Persistency in that outperformance success adds to the complexity. Choosing a winning manager is the challenge.
The current referenced paper addresses these issues. An earlier paper addressed these same issues in considerable depth. Here is a Link to that excellent research:
The author, Anttim Petajisto, concluded that " Although the average actively managed mutual fund has underperformed its benchmark index, both the type and the degree of active manage- ment matter considerably for performance."
The two papers complement one another. The Petajisto paper recommends a portfolio that contains a mix of Index products and actively managed funds selected from the most active cohort. Good luck and enjoy the reference.
Is there an "active share" study that incorporates survivor bias? If not, I wonder about the value of the measure. Funds with high active share that do well will survive and tilt study results in favor of active share while funds with high active share that do terribly disappear from the results. Without incorporating survivor bias the numbers will be skewed, especially in this case because high active share leads to often extremely anomalous results on both the upside and the down.
I'm sure survivorship bias will impact the numbers, but the studies make a compelling case even without that correction.
Apparently the refinement that you suggested has been at least considered. Here is a Link to a summary that is followed by another Link to the relevant study:
My own portfolio reflects a mix of Index holdings and actively managed funds selected based on the performance records of the managers and not the funds themselves. Fidelity's Magellan fund is a great example of a fund that changed dramatically as the managers changed.
Comments
Nick de Peyster
And then there's Will Danoff ...
David
While manager ownership guarantees nothing, to me this is a much more important criteria and often times ranks higher than expense ratio of an actively managed fund. I'm willing to cut slack to companies like Vanguard and TROW with strong cultures if there managers don't have any/substantial investment in their fund.
And of course for an index fund, it matters little if manager is invested.
Activeshare.info Site:
https://activeshare.info/
The value added by active fund managers is always a controversial subject. There is no easy answer since most active managers fail, but a small fraction do succeed. Persistency in that outperformance success adds to the complexity. Choosing a winning manager is the challenge.
The current referenced paper addresses these issues. An earlier paper addressed these same issues in considerable depth. Here is a Link to that excellent research:
http://www.cfapubs.org/doi/pdf/10.2469/faj.v69.n4.7
The author, Anttim Petajisto, concluded that " Although the average actively managed mutual fund has underperformed its benchmark index, both the type and the degree of active manage- ment matter considerably for performance."
The two papers complement one another. The Petajisto paper recommends a portfolio that contains a mix of Index products and actively managed funds selected from the most active cohort. Good luck and enjoy the reference.
Best Wishes
I'm sure survivorship bias will impact the numbers, but the studies make a compelling case even without that correction.
Apparently the refinement that you suggested has been at least considered. Here is a Link to a summary that is followed by another Link to the relevant study:
http://mutualfunds.com/expert-analysis/the-performance-of-long-serving-active-mutual-fund-managers/
https://poseidon01.ssrn.com/delivery.php?ID=974110106091098096027108093087018090122078057047002065122085019091105015018031065096060017121055126111014098103121006117097002041053089019092099125028080107028091048084032084003023073009068031101071093119107121090124065089118001070115111074121118081&EXT=pdf
My own portfolio reflects a mix of Index holdings and actively managed funds selected based on the performance records of the managers and not the funds themselves. Fidelity's Magellan fund is a great example of a fund that changed dramatically as the managers changed.
I hope this helps.
Best Wishes
https://activeshare.info/about-active-share
https://activeshare.nd.edu/
https://activeshare.nd.edu/academic-research/