Posted inProfile & Features

Forget about active share – It’s active fee you should focus on

Since most fund selectors care about active share, it’s of little surprise they want managers to be transparent about it too, for example by publishing it on their monthly factsheets. Some asset managers indeed do this consistently, such as Skagen, the Norwegian boutique equity fund manager. “We first started reporting active share in 2012, and publish it for all our funds it in our monthly factsheets,” says Midhat Syed, a portfolio analyst at Skagen. “Typically, where we present active share, we also present tracking error, both of which are commonly used and complementary measures of activeness within the industry.”

Despite active share being a popular concept with investors, few asset managers have followed in Skagen’s footsteps. Neptune IM and Woodford IM are among the few major fund houses who make their funds’ active share publicly available.

This reluctance has drawn criticism not only from fund buyers, but also from investment research firms such as Morningstar. “Fund managers could be a lot more transparent about active share, since they all have information related to it readily available. Especially for individual investors it is difficult to get information about active share,” says Jeffrey Schumacher, a manager research analyst at Morningstar.  

But even though fund managers tend to reveal their active share to clients when they ask for it, and use it in client presentations to boast about how active they are, many fund selectors would like fund managers to be more open about it. An often-heard complaint is that the active share figures published by fund managers are just snapshots, that don’t say much about how active a manager is in the longer term.

“Fund managers should be as transparent as possible about their active share, for example by publishing a rolling one-year average rather than just a monthly snapshot,” says Rishma Moennasing (pictured right), an equity fund analyst at Rabobank in the Netherlands. Arild Orgland, managing partner at the Norwegian wealth management firm Industrifinans, agrees: “It’s much more interesting to see how active share develops over time. Fund managers could for example publish a graph showing their active share over a certain time period,” he says.

Active fees

Morningstar’s Schumacher believes active share transparency will increase over the coming years, following the recent spotlights cast on closet trackers, funds that pose as active while they are in practice closely following their benchmarks. “The discussion about index hugging will encourage fund managers to be more vocal about their active share,” he says.

But according to Martijn Cremers, the Dutch scholar who first introduced the concept of active share in a paper he wrote with Finnish colleague Antti Petajisto back in 2009, just publishing active share could produce a misleading picture. That’s because active share should always be seen in connection with costs.

“Nothing is wrong with low active share, as long as fees are low,” says Cremers. “But a low active share creates a higher hurdle for your active positions. For example, if you have an active share of 50% and costs of 100 bps, your active positions need to outperform by 200 basis points to rival the benchmark return. Showing this sort of figure, which you could call the ‘active fee’, helps investors assess the fees being charged for a fund.”

While this sort of transparency is probably a bridge too far for most fund managers, as it would perhaps focus too much on the cost of active management, the fund management industry is undoubtedly headed in the direction of increasing openness. Active share is just one aspect of this transparency drive, albeit an important one, as fund selectors deeply care about it. Those managers who still keep their clients in the dark about how active they really are would therefore do well to follow in the footsteps of those who have started removing the smoke screens. And those companies that already are further down the path of transparency should continue to think of additional ways to improve.

Part of the Bonhill Group.