Some mutual fund executives must be getting pretty fed up with the academic world. First there was the study Mutual Fund Fees Around the World published last year by three professors from Harvard Business School, the London Business School and the Georgia Institute of Technology, which concluded that mutual fund fees in Canada are the highest in the world (and significantly higher than the world average). Now, as Larry MacDonald pointed out in his blog last week, there’s a new study by two professors from the Yale School of Management which concludes that a good portion of actively managed mutual funds (in the U.S., at least) are closet indexers.

This latest study, titled How Active is Your Fund Manager? A New Measure That Predicts Performance, suggests that many investors who are paying for active management are in essence getting a portfolio that closely mirrors an index. The researchers point to a ratio known as Active Share, which (along with tracking error) they use to measure how actively managed a fund really is. Active Share is simply the fraction of a portfolio that is different from the benchmark index. Among their findings:

• Active management, as measured by Active Share, significantly predicts fund performance. Funds with the highest Active Share outperform their benchmarks both before and after expenses, while funds with the lowest Active Share underperform after expenses.
• There has been a significant shift from active to passive management over the 1990s. Part of this is due to index funds, but an even larger part is due to closet indexers and a general tendency of funds to mimic the holdings of benchmark indexes more closely.
• Small funds are more active, while a significant fraction of large funds are closet indexers.

What will those damn academics come up with next? It’s almost as if they think the fund industry is out of shape...