Patient Capital Outperformance:  The Investment Skill of High Active Share Managers Who Trade Infrequently
Martijn Cremers, University of Notre Dame
Ankur Pareek, Rutgers Business School

This study shows that high active share portfolios (portfolios whose holdings differ substantially from the holdings of their benchmarks) outperform their benchmarks on average only if invested in patient investment strategies with stock holding periods of at least two years. Funds that trade frequently generally underperform, regardless of their active share. Among funds that infrequently trade, separating closet index funds from truly active funds is crucial. The average outperformance of the most patient and distinct portfolios equals 2.30% per year—net of costs—for retail mutual funds. Stocks held by patient and active institutions in general outperform by 2.22% per year and by hedge funds in particular by 3.64% per year, both gross of costs

Transaction costs are a well-known drag on investment performance. This study shows that funds that do not turnover much, but which take strong active positions, tend to perform better than those that trade frequently or those that do not take active positions. The results have strong implications for the design of active trading strategies and for the establishment of profitable investment disciplines.