Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently

Abstract

Among high Active Share portfolios – whose holdings differ substantially from their benchmark – only those with patient investment strategies (with holding durations of over 2 years) on average outperform, over 2% per year. Funds trading frequently generally underperform, including those with high Active Share. Among patient funds, separating closet index from high Active Share funds matters, as low Active Share funds on average underperform even with patient strategies. Our results suggest that U.S. equity markets provide opportunities for longer-term active managers, perhaps because of the limited arbitrage capital devoted to patient and active investment strategies.

The online appendix to this paper is available at http://ssrn.com/abstract=2498743.

Keywords: Performance, Active Share, Mutual Funds, Institutional Portfolios, 13F, Fund Duration, Turnover

JEL Classification: G12, G24