By Scott Ronalds

The notion of “active share” is in the news again. Coined by a pair of Yale professors in 2007, active share is a measure that indicates just how actively managed a fund really is. In other words, it is a gauge of how much a fund looks like, or overlaps, a certain index or benchmark. A fund with an active share of 100% would have no replication of the index, whereas a fund with an active share of 0% would look exactly like the index.

Dan Richards, a faculty member at the University of Toronto’s Rotman School of Management and president of Clientinsights, expanded on the concept in an article in Monday’s Globe and Mail titled Only the Truly Active Fund Managers Lead the Pack.

Richards highlights some of the professors’ key findings on the topic, including:

• only half of actively managed funds are truly active, defined by the professors as those funds with an active share of 80% or higher (based on 2003 U.S.-based data);
  
• there has been significant growth in “closet indexers” – funds that closely track the index;
  
• there is a direct correlation between true active management and performance (i.e., funds with the highest active share outperformed their index);
  
• size matters (smaller funds outperformed larger funds); and
  
• high active share doesn’t mean greater volatility.

He closes his piece by suggesting that Canadians need to be diligent when selecting actively managed funds to ensure they are getting what they are paying for.

We’ve written on the topic in a past blog and article and, not surprisingly, we’re in the same camp as Richards and the Yale researchers. To beat the index, you have to look different than it and focus on your best ideas. Yet, it’s not always easy to determine how closely a fund mirrors its benchmark. To assist investors in this respect, we calculated the active share of our equity funds. Based on year-end data, the ratios were as follows:

• Equity Fund – 77%
  
• Global Equity Fund – 91%
  
• Small-Cap Equity Fund – 97%

Now that’s undexing.