How Actively Managed Are Some of the Biggest Large-Blend Funds?

We recently took a look at actively managed large-blend funds and in particular the degree to which their performances have correlated with that of the benchmark S&P 500 index. First we looked at funds from this group that historically have shown low levels of correlation with the index and that our analysts like. Then we called out funds that not only showed high levels of correlation with the index but that had the nerve to charge investors above-category-average fees for performance that an index fund might deliver at a fraction of the cost.

To gauge a fund's correlation with the index, we used a metric called R-squared, which measures the degree to which a fund's movements can be explained by the movements of a benchmark. But active share is another method of measuring correlation between a fund and its benchmark.

How to Look at Active Share
Rather than focusing on performance correlations, as R-squared does, active share looks at how different a fund's portfolio is relative to a given benchmark. This includes differences in security selection and/or weightings of the same securities. Active share is expressed on a scale of 0 to 100, with 0 representing complete overlap of the two portfolios and 100 representing no overlap at all. So a fund that tracks the S&P 500 index would have an active share rating of 0 compared with the index itself, whereas a fund that holds none of the stocks in the index--such as a small-cap fund--would have an active share rating of 100 compared with the index.

It's important to note that just because a fund has a high active share rating doesn't mean it will outperform one that sticks closer to the benchmark. As Russ Kinnel, Morningstar's director of fund research, discusses in this article, other measures such as expense ratio and Morningstar Rating for funds tend to be more useful in identifying funds that outperform (note that his analysis of active share was limited to U.S. equity funds). However, as a measure of how different a fund's portfolio looks compared with its benchmark, active share is quite useful. So, for example, an investor who uses an S&P 500 index fund as a core holding--but is looking for an actively managed large-cap fund as a complementary holding--might use active share to identify a fund with a portfolio that bears little resemblance to the index.

We decided to look at active share among the biggest actively managed large-blend funds (in terms of total assets) using Morningstar's Direct platform, which is aimed at institutional investors and which provides a fund's active share measurement relative to a benchmark on any given date. The table below lists the 20 largest actively managed large-blend funds from highest active share rating to lowest as of May 22. For comparison's sake, we've also included the fund's active share rating from five years earlier.

The two funds at the top of the list illustrate the fact that differentiating from the benchmark is no guarantee of superior performance.  Longleaf Partners (LLPFX), with the highest active share rating both now (96.3) and five years ago (97.4), currently carries a 1-star rating while right behind it in second place is  Sequoia (SEQUX) (92.0 now; 97.1 five years ago), a 5-star fund. Many of the funds on the list have become slightly more indexlike in their portfolios compared with five years ago, though in the case of  Strategic Advisers Core (FCSAX) this step closer to the benchmark has been far more dramatic.  JPMorgan US Large Cap Core Plus (JLCAX) on the other hand, has become less like the index.

20 Biggest Large-Blend Funds By Total Assets
	Star Rating	Analyst Rating	Assets	Active Share as of 5/22/13	Active Share as of 5/22/08
Longleaf Partners (LLPFX)		Gold	$8.3 billion	96.3	97.4
Sequoia (SEQUX)		Gold	$6.6 billion	92.0	97.1
FMI Large Cap (FMIHX)		Gold	$7.8 billion	91.1	93.3
Yacktman Focused (YAFFX)		Silver	$9.8 billion	83.7	89.8
Hartford Cap Appreciation (ITHAX)		Bronze	$11.4 billion	82.1	77.2
Franklin Rising Div (FRDPX)		Bronze	$10.7 billion	81.8	89.9
Yacktman (YACKX)		Gold	$11.1 billion	81.6	86.7
Davis NY Venture (NYVTX)		Gold	$20.5 billion	81.1	75.8
JPMorgan US Lg Cp Core Plus (JLCAX)		N/A	$8.2 billion	80.0	63.7
Oakmark (OAKMX)		Gold	$9.6 billion	74.8	83.1
Vanguard Dividend Growth (VDIGX)		Gold	$14.8 billion	72.1	66.5
GMO Quality III (GQETX)		Silver	$14.4 billion	70.3	66.1
Hartford Cap Apprec HLS (HIACX)		N/A	$7.9 billion	68.8	72.6
Am Funds Invmt Co of America (AIVSX)		Silver	$61.9 billion	65.7	55.7
Am Funds Fundmntl Investor (ANCFX)		Gold	$58.0 billion	64.9	65.9
Fidelity Series All-Sect Eq (FSAEX)		N/A	$10.4 billion	57.3	54.9
Fidelity Growth & Income (FGRIX)		Bronze	$6.5 billion	56.8	78.4
Fidelity Dividend Growth (FDGFX)		Silver	$7.9 billion	53.2	69.5
JPMorgan U.S. Equity Instl (JMUEX)		Neutral	$8.1 billion	51.1	48.2
Strategic Advisers Core (FCSAX)		Neutral	$10.5 billion	32.8	64.4
Morningstar Rating data as of May 24.