Active Share in Mutual Funds is a Misunderstood Metric, According to New Fidelity® Report

Fidelity Research Challenges Widely Held Beliefs on Active Share’s Predictive Power

BOSTON--()--Fidelity Investments®, a leading global asset management firm with $1.9 trillion in managed assets, today released a new paper -- Active Share: A Misunderstood Measure in Manager Selection -- which challenges several commonly held beliefs on active share, a widely-used metric for evaluating actively-managed mutual funds.

Active Share is simply a measure of a portfolio’s differentiation from a benchmark. In recent years, the investment community has embraced a concept that active share can serve as a gauge to measure the extent a mutual fund is “actively managed” and as an indicator of potential future excess return.

“Our research shows that active share is not predictive of excess returns and should not be a single, deciding factor to evaluate portfolio manager skill or a mutual fund’s return potential,” says Timothy Cohen, chief investment officer at Fidelity Investments.

Mr. Cohen led a Fidelity research team that examined more than 2,000 mutual funds over a 15-year period and concluded the following:

  • Active share is not predictive of excess returns. Historical correlation of active share and excess return appear to be driven by a small cap bias in portfolio stock selection.
  • Differing from the benchmark doesn’t mean a portfolio manager will beat the benchmark. While excess returns seem to increase with higher active share, so does downside risk and dispersion of returns.
  • Investors should understand the sources of active share – whether the funds suffer from style drift and are out of mandate, or simply need a new benchmark.
  • Active share is just one metric to consider when assessing active managers. It should be used as part of a broader analytical framework when evaluating and selecting mutual funds.

Read the full report here.

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Contacts

Fidelity Investments
Jeff Cathie, 617-563-2420
jeff.cathie@fmr.com
or
Fidelity Corporate Communications, 617-563-5800
fidelitycorporateaffairs@fmr.com

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Contacts

Fidelity Investments
Jeff Cathie, 617-563-2420
jeff.cathie@fmr.com
or
Fidelity Corporate Communications, 617-563-5800
fidelitycorporateaffairs@fmr.com