Martijn Cremers
University of Notre Dame
Ankur Pareek
Rutgers Business School
1.Active management
–Active Share: Difference in holdings
–Historical Active Shares, by fund type and size
–Active Share and performance (updated and by style)
2.Patience: a rare skill?
–Fund Duration
–Active Share, patience and performance in 3 samples:
–Retail Mutual Funds (net returns)
-Aggregate Institutional Long-only Equity Holdings (13F)
-Aggregate Hedge Fund Long-only Equity Holdings (13F)
3.Conclusion
-Investorsface basic choice between
i)Actively managed funds
ii)Passive benchmark (index fund or ETF)
-What does ‘active’ mean?
-Basic definition: ‘active’ means different
-Outper formance only possible if fund is different
-and fees not too large relative to overlap
-How do we measure this?
-How many people can be ‘above average’?
–What percentage of benchmark assets can beatthe benchmark?
-Logic: exactly half the holdings
–Active funds: Active Share (clearly) above 50%
-Benchmark-specific: S&P 500 versus Russell 2000
–100 randomstocks from S&P 500, value-weight
–Result: Active Share of about 80%
–100 random stocks from Russell 2000: Active Share of 95%
–Benchmark concentration / # of stocks / liquidity / etc.
(data in study starts in 1990 and ended in 2003, updated to 2013 here)
For all actively managed all-equity retail mutual funds:
-Calculate Active Share at the end of this year
-Assign benchmark
–Based on self-declared benchmark if available
–Otherwise assigned based on holdings overlap
-Calculate fund’s net returns
–Over the next 12 months
–Benchmark-adjusted: deduct benchmark return
–Net: after deducting all fees & trading costs (except loads)
-Repeat everything at the end of next year
-Successful managers need
–Skill, guts and opportunity
–Don’t need skill to have a high Active Share
-Do need guts and opportunity
-Suppose: I have a lot of guts and opportunity
–But no skill…: How long would I survive?
-Skill: hard to measure, attracts flows and is expensive
-Is skill scalable? Time-varying? Transferable? Rare?
-What is a rare skill?
(with high Active Share)
-Fund Duration
–average length of time an average dollar in the portfolio has been in the portfolio (in the last 5 years)
-Robustness: turnover & holdings-turnover
-3 samples:
1.retail mutual funds –net returns
2.all institutional portfolios (13Fs) –quarterly holdings
3.hedge funds (13Fs) —(long-only) quarterly holdings
-Alternative patience proxies
–turnover (mutual funds)
–holdings-based turnover (for institutions and hedge funds)
-Controlling for flows / size / year f.e. / etc.
–In pooled panel regressions
-Controlling for longer-time changes in turnover
-BaB(Betting against Beta) and QmJ(Quality minus Junk)
–Cannot explain results for institutions & hedge funds
–Low Active Share funds: tended to underperform
–High Active Share funds: tended to outperform
-Large cap: high Active Share did not underperform
-Small cap: high Active Share outperformed
-Patient funds with high Active Share outperformed
–Mutual funds
–Institutions (holdings-based, long-only, 13Fs)
–Hedge funds (holdings-based, long-only, 13Fs)
-Impatient funds (had holdings which) underperformed
–Low Active Share funds: More underperformance with more frequent trading