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Active share is a measure of the difference between a portfolio and a benchmark. It’s an important concept for investors wishing to judge how fund managers’ portfolios deviate from the index, and how that affects performance. It can show clearly when a fund is a "closet index tracker", one that holds shares very similar to the index but charges fees associated with active management. (The higher the active share, the more the fund differs from the benchmark).
Looking at active equity funds across the globe, some invest in narrow markets, such as Danish, Italian, or Singaporean equities, with highly concentrated benchmarks and only a short list of constituents. On the other hand, in global or regional categories, indexes hold a far longer list of names, with the largest stocks carrying lower weights than in narrow-market indexes. In a broadly diversified market like this, an active fund manager can deviate from the index much more easily, without excessively diverging in terms of style or market cap, than in a concentrated market.
As a single-country market, the UK is reasonably large in terms of the number of issuers, but it does have a degree of concentration at the upper end, which can potentially limit the active share for large-cap-focused portfolio managers.
In the study, we took a broad look across Morningstar Categories to understand similarities and differences between their levels of active share. This allowed us to show just how different categories are in terms of their active-share profiles, confirming the intuition that top-heavy indexes represent a more difficult investment universe from which to build high-active-share portfolios, at least without taking meaningful off-benchmark positions. The number of securities in a benchmark also plays a role, but to a lesser extent than concentration.
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