Active Share: A Blessing and A Curse

Abstract

We examine the implications of active mutual fund management across manager skill levels. We find that funds in the highest active share quintile outperform funds in the lowest active share quintile on a risk-adjusted basis. When sorted on both active share and capture ratio, only managers with high skill and high active share experience positive future performance. Funds with high active share and low skill experience negative future risk-adjusted returns, and these funds underperform all funds with low active share. We conclude that only funds with both high active management and high manager skill are preferable to index funds.

JEL Classification: G2,G23