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Active Share Scores: Easy to Understand, Hard to Interpret

Testing how the measure works in practice.

The Letter of the Law Last month, the New York attorney general's office published a letter recommending that investors in actively managed stock funds consult a calculation called Active Share. It is an unusual thing for an attorney general to give such specific investment advice. Then again, New York attorneys general tend to be an unusual breed.

(Morningstar currently does not publish Active Share scores on, but will do so in the future. They are available in our institutional, Morningstar Direct product)

Active Share has the advantage of being conceptually simple. It measures how much (or little) a fund’s portfolio holdings diverge from that of its benchmark. If the fund diverges greatly, it receives a High Active Score. If it diverges little, it receives a Low Score. One needn’t know much investment math to understand the concept.

Those who use the Active Share measure universally praise high scores. They signal funds that earn their keep—funds that are truly idiosyncratic. Their managers do not take the easy path by merely tweaking a benchmark portfolio. Conversely, Low Active Share scores are condemned, particularly if they are accompanied by above-average expense ratios.

The New York attorney general’s office writes:

"Investors who choose to buy actively managed funds are choosing to pay more than they would for index funds, and therefore should seek to understand what additional value they may obtain in exchange for higher fees."

Testing the Proposition In response to the New York attorney general's press release, a trade publication called Ignites compiled two lists. One was of the 10 fund companies that have the highest average Active Share scores; the other was the 10 firms that have the lowest. (As Ignites articles are paywalled, I cannot provide an article link.) This provides the opportunity to test how the Active Share measure has fared in practice.

(The Ignites charts are incomplete, as its researchers only considered funds that had relatively high expense ratios. Thus, Vanguard and American Funds, to name two industry giants, were ineligible. But the groups serve their purposes, in that the High Active Share firms do indeed have higher scores than do the Low Active Share companies.)

For each of the 20 families, I screened for the following funds:

  1. U.S. diversified equity
  2. Oldest share class
  3. Actively managed

For each family, I computed a) the average expense ratio, b) the average trailing five-year return, c) the average category ranking for that statistic, d) the average trailing five-year standard deviation, and e) the average category ranking for that statistic. That reads like a headache, but it will seem straightforward enough when I show the results.

(Two notes. One, I eliminated international-stock funds from the study, because although the New York attorney general finds those Active Share scores to be helpful, I do not. Second, all averages are equal weighted.)

Costs More, Returns Similarly First, the expense results:

  1. High Active Share: 1.18%
  2. Low Active Share: 0.91%

For the New York attorney general, those figures indicate that the fund industry takes portfolio-manager activity into account when pricing its offerings. Funds that are run idiosyncratically tend to cost more than the cookie-cutter funds. While that is true, I suspect that the bigger factor is that firms with high Active Share scores tend to be small-company specialists, and small-cap funds typically sport large price tags.

Total returns were a wash:

  1. High Active Share: 11.67%
  2. Low Active Share: 11.62%

That rates as a modest success for High Active Share, considering that the group carried a 27-basis-point expense handicap.

Total-return category rankings were also close, but the order was reversed:

  1. High Active Share: 51
  2. Low Active Share: 48

This time, the Low Active Share funds prevailed—not that I would make much of that. The takeaway from the total-return figures is that overall, the High Active Share and Low Active Share groups landed in much the same place, both in absolute and relative terms.

Greater Risk—or Not? With volatility, the two groups diverged. The average standard deviations were:

  1. High Active Share: 12.11%
  2. Low Active Share: 11.29%

Funds from the High Active Share families were somewhat more volatile. Thus, because they had such similar total returns, they posted weaker risk/return profiles. This finding comes from a single time period, meaning that it should be considered no more than suggestive. However, that showing must be regarded as disappointing, given how aggressively the New York attorney general has promoted the Active Share measure.

The question then becomes: Why were the High Active Shares funds riskier? The natural answer, of course, is because they were more active. The unnatural answer is that just as portfolio-manager activity doesn’t necessarily lead to better total returns, it also might not create higher risk. Perhaps High Active Share funds are not more volatile because their managers behave differently, but because they occupy different categories—that is, more of them are small-company funds.

Indeed, that seems to be so. The average rankings for standard deviations, by category, were as follows:

  1. High Active Share: 44
  2. Low Active Share: 48

Since in Morningstar's system 1 means "the lowest risk" and 100 means "the highest risk," this indicates that High Active Share funds, when adjusted for their investment style, were slightly less volatile than the Low Active Share funds. To pose a rhetorical question, how many users of Active Share scores would have expected that? To answer that question: Few indeed.

In summary, the New York attorney general’s office had its heart in the right place when it stated that fund shareholders should receive value for their purchases, and that Active Share could be a useful tool for ensuring that higher-cost funds aren’t investing via lower-cost paths. However, Active Share scores can be tricky to interpret, because they are influenced by structural factors.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.

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About the Author

John Rekenthaler

Vice President, Research
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John Rekenthaler is vice president, research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Rekenthaler joined Morningstar in 1988 and has served in several capacities. He has overseen Morningstar's research methodologies, led thought leadership initiatives such as the Global Investor Experience report that assesses the experiences of mutual fund investors globally, and been involved in a variety of new development efforts. He currently writes regular columns for and Morningstar magazine.

Rekenthaler previously served as president of Morningstar Associates, LLC, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. During his tenure, he has also led the company’s retirement advice business, building it from a start-up operation to one of the largest independent advice and guidance providers in the retirement industry.

Before his role at Morningstar Associates, he was the firm's director of research, where he helped to develop Morningstar's quantitative methodologies, such as the Morningstar Rating for funds, the Morningstar Style Box, and industry sector classifications. He also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

Rekenthaler holds a bachelor's degree in English from the University of Pennsylvania and a Master of Business Administration from the University of Chicago Booth School of Business, from which he graduated with high honors as a Wallman Scholar.

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