Every Friday, chief editor Peter van Kleef discusses thought-provoking topics with Robeco experts. This week: the active share lobby.
With a strong sense of “we're laying down the gauntlet”, this week investment boutique Neptune Investment announced it would include the 'active share' of each of its funds in the fact sheets. Threadneedle Investments was one of the first asset managers to respond by saying that it would follow suit. The active share is a measure of how active a fund is, ranging from 0 (investing exactly in line with the benchmark) to 100 (no overlap between the portfolio and the benchmark).
This announcement by Neptune and Threadneedle increased pressure on other asset managers to disclose this figure. Spotlighting active share is a good thing, believes Robeco’s CIO Equities Peter Ferket. “It is more effective than the tracking error as a measure to ensure that a fund is genuinely active. With an active share of 20 or 30, you aren’t deviating from the index enough to cover your costs.” As a rule, 60 is seen as the lower limit for a genuinely active fund – a figure Ferket agrees with.
But how does this work at Robeco, which doesn't disclose active share data in the fact sheets? “You can't use this as a one-size-fits-all approach to assessing funds. It's harder for country funds to achieve a high active share, because an index always includes a few big names that are difficult to circumvent. Royal Dutch in the AEX is one example. This makes it almost impossible to achieve an active share of above 80.”
Robeco's enhanced indexing funds have an active share of between 35 and 40 – but also the lowest costs. The normal emerging markets funds score around 70, while the non-benchmark funds like Global and Emerging Stars, Rolinco and Global Premium score between 85 and 95. “We are looking into the possibility of including active share data in the fact sheets. And we have no qualms about doing this, because it's relevant information and our active share data is laudable”, says Ferket.
A high active share is not a guarantee for outperformance. “But it is a guarantee of a performance that deviates from the index – and that deviation should be positive over the longer term, of course.” Nor is a high active share always what it seems, claims Ferket. “It's very easy to achieve a high active share by comparing the portfolio to a less relevant benchmark. This will give you a high figure, but say little about your fund."
An active share below 50 or 60 is a sign of things to come, Ferket thinks, because the fund manager isn't deviating enough from his benchmark or reference index to have a chance of covering his costs. “But you can't say that an active share of 98 is necessarily better than one of 87. And furthermore you have to ask yourself whether the reference index is applicable.”
Not everyone sees a high active share as entirely positive. For instance, there is a positive correlation between risk and active share and a high active share is often a logical consequence of an overweight in (less liquid) small caps or emerging markets – a strategy that doesn't always work out well everywhere. A high active share cannot be an objective in itself and is certainly not the Holy Grail. Those who rely solely on this figure could even get their fingers burnt, as the fate of some high active share funds has proven.
Active share should mainly be seen as an extra instrument on the dashboard, to be used in combination with other variables such as a fund's tracking error. Other asset managers, regulators and in Sweden even investors threatening legal action are putting increasing pressure on fund institutions to publish active share fund data. Ferket believes this to be a good thing.
There’s even a chance this will become a requirement in due course. “Maybe not legally, but resulting from pressure from the market. If Morningstar makes inclusion of a fund's active share in the fact sheets a requirement, the process will be rapidly accelerated.” Eventually this will result in a level playing field with passive and genuinely active products, without the gray area of 'active' funds that – despite their high fees – are 'index huggers'. And everyone will benefit from that.