Active fund management fees fall by 15%
Analysis by FundCalibre shows that fees for actively managed equity funds have fallen by more than...
Active management is a way of running a portfolio in order to try to outperform an index or benchmark. It is characterised by relying on a manager’s stock-picking skills, believing they have the abilities to identify the best stocks available and generate a higher return from them, this outperforming a benchmark. These funds often have higher management fees and ongoing charges than passive/index fund managers – those who aim to match the benchmark – in order t justify the more frequent trading and deeper analysis needed.
What had become a ‘trendy’ tool of late to assess active management is Active Share. Research has shown that the funds that are significantly outperforming their indices and peers, often have a high Active Share, and that it is an accurate measure in predicting future performance. So should it be your new go-to fund comparator?
Firstly, let’s look at how it works. Active Share is a percentage figure, from 0-100, and the closer the number is to 100, the more stocks the fund manager’s choices differ from the benchmark. For example, if Vodaone made up 5% of the benchmark, and a fund didn’t hold it, the fund would immediately have 5% Active Share, whereas if the fund held 5% in a small stock, not in the benchmark, it would also gain a 5% Active Share score. It is a useful measure to show how a fund overlaps with its benchmark and how a fund uses active management to differentiate from it.
Two examples of funds which have recentaly added Active Share to their fund factsheets are Neptune, who Elite Rated UK Mid Cap fund has an Active Share of 94.3%, and Baillie Gifford, who Japanese fund, also Elite Rated, has an Active Share of 81%. With both of these funds generating 42.77% and 9.14% returns in the past two years* compared to 17.29% and 7.27% for their respective benchmarks, it adds weight to the correlation between a high Active Share and good performance.
On the other side, Active Share also highlights what are known as ‘closet trackers’. These are funds claiming to be actively managed, which charge the higher fees associated with active management, but in truth behave like passive managers and just match, or track, their benchmark.
However, active management has more facets to just picking and holding a stock; there are various other tactics that managers use that could adversely affect the Active Share score. One of these is where a manager will have temporary preferences to certain areas of the market, and could therefore move between overlapping the benchmark or not. For example the manager may believe that smaller, high-growth stocks will be in favour, which are unlikely to be on the benchmark, and therefore the Active Share will be high. Converselt, he may be less optimistic about the market, and move his portfolio into larger, less risky companies, which are likely to be on the benchmark and therefore, the Active Share score falls.
With all that in mind, Active Share is clearly a useful tool in comparing funds. While funds that are generally successful usually have a high Active Share score, having a high score is by no means a guarantee of success, just that a manager is differentiating themselves, and trying to outperform a benchmark, which they equally could underperform. We use it as a starting point when researching a fund, not the end point, and use a variety of other factors too, to decide whether or not to award a fund an Elite Rating.
*Figures correct as at 13/07/2015