What it means
The calculation compares the weight of every holding in the fund against its weight in the benchmark, adds up the absolute differences and halves the total. Halving is necessary because every overweight position is matched by an underweight somewhere else, so without it each difference would be counted twice.
The measure became popular because it exposes closet indexing directly. A fund with an active share of 25% has only a quarter of its portfolio doing anything distinctive, so a fee of 0.8% is effectively being charged on the whole portfolio for a quarter of the effort.
Rules of thumb have emerged in fund selection. Below roughly 60% a fund is often considered too close to its index to justify active fees, between 60% and 80% is genuinely active, and above 80% represents a high conviction portfolio that will behave very differently from the market.
Active share and tracking error measure related but distinct things. A fund can hold many different stocks within the same sectors and show high active share with modest tracking error, while a fund holding index names in unusual proportions can do the opposite, so the two are best read together.
The measure has real limits. A high active share simply means a fund is different, not that it is good, and choosing a sensible benchmark matters enormously since comparing a global fund against a domestic index will produce a meaninglessly high score.
In practice
Real-world examples.
Example
A pension consultant screens twelve equity managers and finds three with active share below 45%. All three are recommended for replacement by index funds, since their fees cannot be justified by the small proportion of genuinely different holdings.
Example
A concentrated fund holds only 25 stocks and reports active share of 92%. Its investors are warned to expect long stretches of underperformance, because a portfolio that different will diverge sharply from the index in both directions.
Example
A global equity fund reports 96% active share against a domestic index. The adviser insists on recalculating against a global benchmark, where the figure falls to 71%, revealing that most of the apparent difference was simply geography.
Think of it
“Active share shows how different your holdings are from the index-true active management.
Formula
Calculation
Active share = 0.5 x sum of the absolute differences between each holding's portfolio weight and its benchmark weight
Consider a simplified benchmark of five equally weighted companies, A to E, each at 20%. A fund holds A at 35%, B at 25%, none of C, D or E, and a 40% position in company F which is not in the benchmark at all.
The absolute weight differences are: A, 35% - 20% = 15%; B, 25% - 20% = 5%; C, 0% - 20% = 20%; D, 20%; E, 20%; and F, 40% - 0% = 40%. Adding these gives 15% + 5% + 20% + 20% + 20% + 40% = 120%, and halving it gives an active share of 0.5 x 120% = 60%.
That 60% tells the investor that six tenths of the fund's portfolio is genuinely different from the index. If the fund charges 0.85% a year, the fee attributable to the active portion is effectively 0.85% / 0.60 = 1.42% on the part that is actually doing the work.Case study
Seen in the real world.
This is an illustrative and entirely fictional example. Kelso Wealth Partners, an invented advisory firm, reviewed the eight equity funds it recommended to clients and calculated active share for each for the first time. Six scored above 70%, one scored 63%, and one scored 31% despite charging 0.88% a year.
The 31% fund had beaten its benchmark in three of the previous five years, so it had never attracted scrutiny. Closer inspection showed the outperformance came almost entirely from a single overweight position held for eighteen months, while the other 69% of the portfolio tracked the index closely enough to be replaced by a fund costing 0.06%.
Kelso's fictional investment committee did not drop the manager outright. It reduced the allocation and told clients plainly that they had been paying an active fee on an index shaped portfolio, a conversation the firm now has before recommending any fund rather than five years afterwards.
Watch out
Common mistakes.
- Forgetting to halve the sum of absolute weight differences, which doubles the result and can push a perfectly ordinary fund above 100%.
- Treating a high active share as evidence of skill, when it only shows the manager is different and says nothing about whether the differences pay off.
- Calculating active share against a benchmark the fund was never meant to follow, which produces a high score for no meaningful reason.
Questions
People also ask.
Can active share be above 100%?
No, the measure is bounded between 0% and 100% for a long only fund, and a result above that means the halving step was missed.
Does high active share predict better returns?
Research suggests high active share funds have a better chance of outperforming, but the dispersion of outcomes is much wider, so more of them also do badly.
How does active share differ from tracking error?
Active share looks at how different the holdings are, while tracking error looks at how differently the returns behave, and a fund can score high on one and low on the other.
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