Are Fidelity Managers Active Enough?
Separating the most active managers from the index-huggers.
It's tough to beat the market by emulating it, but that doesn't stop money managers at Fidelity and elsewhere from trying. Over at least the past couple decades, fund portfolios have come to look increasingly like the benchmarks they aim to defeat. They know that may make it harder for their funds to stand out, but it also limits the risk of dramatic underperformance. The latter, even over short stretches of times, can cost managers their jobs, especially if shareholders head for the exits as a result.
What's good for fund managers' job security, though, isn't necessarily good for investors. That's one takeaway from a 2009 study by Yale academics Martijn Cremers and Antti Petajisto. The duo developed a simple metric called active share to describe how similar a fund's holdings are to an index's. (A fund with 60% overlap with an index would have 40% active share, for example.) Examining data between 1990 and 2002, the Yale professors found that funds with higher active share--that is, funds that take more risk versus the index--had better long-term returns. Morningstar director of fund research Russell Kinnel came to a similar conclusion focusing on data between 2004 and 2009.
Still, I'm not entirely convinced higher active share itself leads to better performance. A highly active but talentless manager would be an awful combination, after all. More freedom to succeed necessarily means more freedom to fail, so it's all the more important to invest alongside managers who can put it to good use.
Christopher Davis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.