When purchasing an actively managed mutual fund, investors want to make sure they're getting their money's worth. Active managers on average charge higher expenses than passive products, such as index mutual funds or exchange-traded funds, and, accordingly, their funds' portfolios are expected to be distinct from their bogies, with a better chance of outperforming their benchmark. There are several metrics that can help investors evaluate how distinct their funds are, from returns-based statistics such as R-squared, to those based on holdings, such as active share (for more background on active share, check out this article). When these metrics show an active fund is becoming more correlated with its index, it can be a warning sign to investors that their fund may be losing some of its edge.
Recently, a few funds stood out with a decreasing active share, indicating a higher percentage of their portfolios now overlap with their respective index. While these funds may not be transforming into closet index-huggers, a closer alignment with their index can be a tip-off for investors that the active portion of their own portfolio is decreasing.
To view this article, become a Morningstar Basic member.
Kathryn Spica, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.