Active Share and Mutual Fund Performance

Abstract:     
I sort domestic all-equity mutual funds into different categories of active management using Active Share and tracking error. I find that over my sample period until the end of 2009, the most active stock pickers have outperformed their benchmark indices even after fees and transaction costs. In contrast, closet indexers or funds focusing on factor bets have lost to their benchmarks after fees. The same long-term performance patterns held up over the 2008-2009 financial crisis, and they also hold within market cap styles. Closet indexing increases in volatile and bear markets and has become more popular after 2007. Cross-sectional dispersion in stock returns positively predicts average benchmark-adjusted performance by stock pickers.

Number of Pages in PDF File: 47

Keywords: Active Share, Tracking Error, Closet Indexing

JEL Classification: G10, G14, G20, G23

working papers series