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Fund Spy

Find Out How Active Your Fund Is

Active share shows whether a portfolio is an index-hugger or a maverick.

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Investors paying for active management want to be sure they are getting what they pay for. Over the years, various measures have been created to gauge whether a fund is behaving like an index or charting a different course. The latest entry is a promising one that is based on portfolio holdings rather than performance.

Active share offers a couple of elegant solutions to problems with Modern Portfolio Theory statistics. Created by Yale's Martijn Cremers and Antti Petajisto, active share replaced a one-index-fits-all approach with one that measures funds against all indexes in a database to see which they are most like and uses data from the most similar benchmarks. (You may recall we had Petajisto present the paper at our 2007 Morningstar Investment Conference.)

It's also driven by portfolios rather than performance. While Modern Portfolio Theory stats line up a fund's performance with an index, active share compares portfolios to see how different the fund is based on actual holdings. It's easy to calculate. It's the inverse of a fund's holdings' overlap with its closest fitting index. On one end, a reading of 100 means that the fund has no overlap with the index. In fact, a fund could actually go above 100 if it has short names in the index and has no long positions in it. On the other, a reading of zero means that it is identical to an index.

Russel Kinnel has a position in the following securities mentioned above: POAGX. Find out about Morningstar’s editorial policies.