Invesco Powershares, ironically enough, has just published a paper supporting previous research (Active Share and Mutual Fund Performance – Antii Petajisto, CFA Institute – Financial Analyst Journal – July/August 2013) in reference to the ongoing debate about active vs. passive investment management. With the rise of indexing, the question has become – can active money managers beat their associated benchmarks after fees? Invesco, a industry leading provider of passive ETF investments, conducted a recent study analyzing five distinct market cycles over the last twenty years. The white paper can be accessed here:
“Key Takeaways – Over the entire universe studied (including US/foreign, growth/core/value and small/mid/large), active management typically delivered greater value relative to passive benchmarks in terms of excess return, downside capture and risk-adjusted returns.” – Invesco White Paper – “Think Active Can’t Outperform? Think Again” – Wendler and Peckham, 2015
These support Petajisto’s findings in that, managers with high Active Share can outperform their benchmarks over time after fees. As a side note, Active Share measures how much a portfolio differs from its benchmark – i.e. holds different stocks or different weights of the same stock. For example, a portfolio with an Active Share of 100 would have completely different stocks than the benchmark; whereas, an Active Share of 0 would mean the portfolio exactly replicates the benchmark.
While each side of the debate have their own studies justifying their ideology, I feel the main takeaway is that Active Share information is becoming more available for financial advisors to use as they select managers for their clients. Its value is critically helpful in identifying managers who, either by choice or mandate, are closely mimicking their benchmark and limiting the potential alpha they could create.
Invesco White Paper – “Think Active Can’t Outperform? Think Again” – Wendler and Peckham, 2015
Active Share and Mutual Fund Performance – Antii Petajisto, CFA Institute – Financial Analyst Journal – July/August 2013