Active share ‘must be combined with turnover’

Finding alpha-driven fund managers can be made easier by combining the active share measurement with a stockpicker’s average holding period, according to new research.

Active share pioneer Martijn Cremers, a professor at the University of Notre Dame, said his study showed that fund managers with a high active share and long holding periods significantly outperformed markets over the past 26 years.

The research looked at US data and ranked investment funds in active share quintiles, showing the highest quintile – funds with active shares of between 80 and 100 per cent – outperformed by the most in the long term.

Mr Cremers said the same trend was even observed after removing the 2000 dotcom bubble, where active managers significantly outperformed a falling index.

He said: “In the highest active share quintile, almost all of the outperformance historically has come from the patient high active share managers. The outperformance is so large we have become very confident about these results.

“Statistically, we can confirm these managers as a group have outperformed.”

Presenting findings at the Morningstar Conference in London last week, Mr Cremers said investors had to be wary of using either active share or holding period metrics in isolation, as both had the potential to provide misguided signals of a manager’s ability.

Read the entire story on the FT Adviser website.