Deconstructing Active Share
44 Pages Posted: 7 Jan 2015 Last revised: 29 Sep 2015
Date Written: September 28, 2015
We deconstruct the active share measure proposed by Cremers and Petajisto (2009) and find two-thirds of the outperformance of high active share mutual funds can be attributed to the ability of those funds to select out-of-benchmark stocks. However, that ability is limited to high active share funds that use out-of-benchmark positions sparingly. Funds with large out-of-benchmark positions show little ability to select out-of-benchmark stocks. Our results suggest that the best active funds generally stay within their benchmark, deviating only for particularly good purchases, and that conditioning on the amount of out-of-benchmark investing significantly increases the predictive power of active share.
Keywords: Mutual Funds, Active Share, Performance, Alpha, Return, Benchmark, Index, Skill
JEL Classification: G11, G20
Suggested Citation: Suggested Citation