Are you aware of the active share definition? Or why should one use an active share calculator? If not, this post is for you! Here we will discuss about active Share and what formula is used to calculate it. Hence, this article aims to provide valuable information to readers who rarely know about active shares.
What is Active Share?
Developed by Antti Petajisto and Martijn Cremers, the Active Share is the %age of a fund’s holdings distinct from its benchmark. The lower the percentage of active stocks, the more the fund look like its benchmark. In addition, a fund without having in common with the benchmark will have an active share of hundred percent, and a fund with the similar holdings as the benchmark will have an active share of zero percent.
Now you might be aware of what is active share? To know more about it, scroll down and continue reading!
Reasons To Consider Active Share
Active Share was invented in 2006 to measure the degree of active management. This means that active stocks quantify how “different” a portfolio of stocks is from its benchmark index and the ratio of a portfolio that drives performance. Here are some reasons to consider active shares:
· Simple and easy to calculate
· It provides information about a fund exceeding its benchmark
· The practical stand-alone measure of active management
· It does not require any particular model or assumption.
· You can use it in combination with other statistics to get a complete picture of active management.
Active Share Calculation Process
Active Share is not a measure of capability but quantify the difference between the holdings of the fund and the benchmark. Any variance in performance can only result from fund positions that are different from the benchmark, i.e., “active” positions. For a given fund, a higher active part could lead to underperformance or an outperformance.
Therefore, active shares measure the extent to which the number and size of positions in the manager’s portfolio are different from those of a benchmark index. The following equation is for active share calculation:
AS = Active Share
n = total number of securities in the benchmark or portfolio
Wb, i = weight of security i in the benchmark
Wp, i = weight of security i in the portfolio
For instance, an active share of 80% indicates that 80 percent of the fund’s holdings differ from its benchmark (active share values above 100% are possible when there are short positions in the portfolio). Hence, the AS is one of the various aspects of the portfolio which can benefit investors during the fund choice procedure.
Does the active share calculator provide a complete picture of performance?
The Active Share score is a statistic that can be very useful in determining whether a fund manager is active. It offers a new dimension and additional context to help assess active managers.
But the active share calculator is not an all-in-one solution which means if you want to get a complete picture of how a fund is being managed, use it along with other metrics such as tracking error. In addition, it is not a useful risk measure and was not designed for that purpose. Therefore, Active Share’s results remained consistent with their overall conclusion.
Active Share is another tool that investors can add to their toolkit for assessing possible mutual fund investments. However, the measure has certain limitations. If you want a more insightful clarification without coming to the wrong conclusions, you need to consider several factors, including:
The appropriate benchmark used in calculating the active Share should be verified.
Investors should be aware of the structural characteristics of the benchmark, the universe size, and the unique portfolio building procedures.
Also, it is important to keep in mind that whenever you use Active Share, always view with tracking error and active risks.