Investor Corner/Building and judging a portfolio/Evaluating Funds
3.3.3 Active Share
Active share is the percentage of a fund's portfolio that differs from its benchmark. A high active share means the manager is taking genuine, meaningful bets. A very low active share often signals closet indexing, charging active fees for near passive exposure.
What the figure actually measures
Active share compares a fund's holdings, position by position, against its benchmark index's own holdings and weights, and expresses the total difference as a single percentage. A fund with 90% active share differs substantially from its benchmark in what it actually holds; a fund with 20% active share is, in practical terms, holding something quite close to the index itself.
Active share measures the percentage of a fund's portfolio that differs from its benchmark index. A fund with 30% active share is a closet indexer: 70% of its portfolio mirrors the benchmark. A fund with 80% active share is genuinely different from the benchmark, making substantial bets on stocks and weights that diverge from the index. The metric was developed by Cremers and Petajisto and has become one of the most widely used measures of how "active" an active fund really is.
Why low active share combined with high fees is a genuine concern
A fund charging active management fees while running an active share of only 20 or 30 percent is, in effect, delivering a portfolio quite similar to a much cheaper index fund, while still charging considerably more for it. This specific pattern, sometimes called closet indexing, is one of the clearer, more concrete red flags an investor can check for directly using this figure.
The problem with closet indexing is economic: the investor pays active management fees (0.5-1.5% TER) for what is essentially index-like performance. A fund with 30% active share will produce returns that closely track the benchmark, minus its expense ratio. The investor would be better off in an index fund at 0.10% TER. Closet indexing is not an investment strategy; it is a business model that profits the AMC at the investor's expense. Unfortunately, it is more common than most investors realise, particularly in the large-cap category where benchmark hugging is easy and low-profile.
Why high active share alone is not automatically good either
A high active share indicates the manager is taking real, meaningful bets away from the benchmark, but it says nothing on its own about whether those specific bets are actually good ones. High active share combined with a genuinely poor track record simply means the manager has been making large, confident bets that have not worked out well over time.
How PriLytics helps. PriLytics lets you compare a fund's actual performance directly against its benchmark over any period, giving you a practical, results-based check that complements a raw active share figure. Compare against a benchmark.
High active share is necessary but not sufficient for outperformance. A fund can have 90% active share and still underperform badly if the manager's bets are wrong. What active share tells you is whether the manager is genuinely trying to beat the benchmark through differentiated stock selection. Combined with performance data, it separates skilled active managers (high active share, positive active return) from lucky closet indexers (low active share, slightly positive return from minor deviations) and unskilled active managers (high active share, negative active return from bad stock picks).