Active Share Fails to Identify Winning Funds: Morningstar

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The Morningstar report defined a fund’s active share relative to its peers and then compared those ranking in the lowest quintile for active share with the highest quintile.

Among its other findings, a peer group’s active share tends to fall as the concentration in the top holdings of its benchmark index increases, and vice versa, which explains why the active share in large-cap growth funds has fallen to about 60%, an 18-year low. The weighting of the  top holdings in the benchmark index, the Russell 1000 Growth Index, have reached an 18-year high. In contrast, active share in  small- and mid-blend funds (blend refers to growth and value) is 94%.

The Morningstar report concludes that for the most part, advisor clients would be better off  with low, not high, active share funds. It notes, however, that active share isn’t without value; it’s problematic when used to identify superior active strategies. Although the best performing funds tend to have high active shares, so do the worst performing funds.

“With higher active share comes a higher risk of disappointment.”

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