The hottest debate that runs in the investing community is whether or not it is worth it for investors to pay for active management vs. passive strategies. In my view, a balanced mix is necessary in every portfolio. Some strategies require active management (good active emerging market funds have always beaten benchmark indices). Others are better suited for passive strategies (a fund investing in a diversified basket of US equities has rarely beaten the S&P 500 over a medium to long term horizon). Sometimes a tactical switch between active and passive strategies can serve to boost portfolio returns. An investor doesn't have to shun active management altogether just because of high fees. What is required is an intelligent assessment of performance attribution of any actively managed strategy. "Active share" refers to the % of holdings in an active strategy that differ from the benchmark index. A higher active share% usually means that the fund manager's deviation from the benchmark is relatively higher than a fund with a lower active share. Firstly, investors should avoid funds with extremely low active share. Funds like this usually tend to exactly track the benchmark, but they lag benchmark returns by the amount of charges that they impose. It is far better to invest in low cost passive strategies (like ETFs or trackers on the benchmark) than pay hefty fees for low active share. Secondly, where there is a high level of active share, investors need to intelligently assess if the active share is the major contributor the returns. Some funds with high active share may outperform the benchmark during some periods due to a specific event or time bias. It is essential to evaluate performance without biases. Most regulated funds are required to calculate performance attribution and provide this data to their clients. This data is also available on paid sources like Bloomberg that banks have access to.
If the performance attribution data suggests that the high active share has been a consistent contributor to the return outperformance, then it makes sense to invest in that active strategy.
Empower financial discipline.
Empower financial intelligence.