By Scott Ronalds

We don’t spend a lot of money advertising at Steadyhand (at the end of the day, investors pay for it). If we did, you might see something similar to IA Clarington’s latest campaign on Active Mind. But with a Steadyhand spin, of course.

As part of their campaign, IA Clarington highlights Active Share, which is a term coined by a pair of Yale professors (Martijn Cremers and Antti Petajisto). Active Share is a measure of how much a fund differs in composition from its benchmark index. If a Canadian equity fund has an Active Share of 90%, for example, it has very little replication of the S&P/TSX Composite Index. A fund with an Active Share of 20%, on the other hand, is closely mirroring the index.

We’ve been writing about Active Share for a number of years (see Those Damn Academics, Active Management: What are You Paying For? and Active Share). We feel it’s an important concept because in order to beat the index, you have to look different than it. The Yale researchers came to two important conclusions: (1) funds with the highest measures of Active Share consistently outperformed their benchmarks, and (2) smaller funds outperformed larger funds.

In a Clarington video interview with Martijn Cremers, he notes that less than 10% of Canadian equity funds have a high level of Active Share and the bulk of products offered in Canada are simply “closet index” funds. Cremers suggests that one of the reasons for this is that managers have become more benchmark-oriented because investors are quicker to sell if a fund underperforms in the short term. Managers have become too afraid to deviate from the benchmark for a fear of losing assets.

The videos are worth viewing for investors interested in learning more about Active Share. They can be accessed via the Clarington link above.

We periodically calculate the Active Share of our equity funds. Our latest numbers as of March 31, 2012 are:

  • Equity Fund – 89%
  • Global Equity Fund – 93%
  • Small-Cap Equity Fund – 97%

We hope Clarington’s efforts will bring greater awareness to the concept of Active Share and what it means to be a truly active manager. The Yale research suggests that too many Canadian investors are paying too much for what is essentially high cost indexing. We want them to get a better grasp of low fee undexing.