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How Active is Your Fund Manager? A New Measure That Predicts Performance

47 Pages Posted: 21 Mar 2006 Last revised: 7 May 2009

Martijn Cremers

University of Notre Dame

Antti Petajisto

New York University (NYU) - Department of Finance; Yale School of Management; BlackRock, Inc

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2009

Abstract

We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings. We compute Active Share for domestic equity mutual funds from 1980 to 2003. We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Non-index funds with the lowest Active Share underperform their benchmarks.

Keywords: Portfolio management, Active Share, tracking error, closet indexing

JEL Classification: G10, G14, G20, G23

Suggested Citation

Cremers, Martijn and Petajisto, Antti, How Active is Your Fund Manager? A New Measure That Predicts Performance (March 31, 2009). AFA 2007 Chicago Meetings Paper; Yale ICF Working Paper No. 06-14; EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891719 or http://dx.doi.org/10.2139/ssrn.891719

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Antti Petajisto (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0378 (Phone)

HOME PAGE: http://www.petajisto.net/

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://www.petajisto.net/

BlackRock, Inc ( email )

400 Howard St
San Francisco, CA 94105
United States
415-670-7911 (Phone)

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