How Active Is Your Fund Manager? A New Measure That Predicts Performance

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Abstract
To quantify active portfolio management, we introduce a new measure we label Active Share. It describes the share of portfolio holdings that dier from the portfolio's benchmark index. We argue that to determine the type of active management for a portfolio, we need to measure it in two dimensions using both Active Share and tracking error. We apply this approach to the universe of all-equity mutual funds to characterize how much and what type of active management they practice. We test how active management is related to characteristics such as fund size, expenses, and turnover in the cross-section, and we look at the evolution of active management over time. We also …nd that active management predicts fund performance: the funds with the highest Active Share signi…cantly outperform their benchmark indexes both before and after expenses, while the non-index funds with the lowest Active Share underperform. The most active stock pickers tend to create value for investors while factor bets and closet indexing tend to destroy value. JEL classi…cation: G10, G14, G20, G23

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