I thought this warranted a bump since the data is now public on Morningstar's website. I would expect them to make this a big part of their future research now that they've gone public with this information.
http://mfi.morningstar.com/BlogList.aspx?month=7&year=2010
Conventional wisdom says that active money managers can't outperform passive indexes. In fact, there are plenty of studies which shown that the average active portfolio manager do not outperform either the Capital Asset Pricing Model, or passive benchmark indexes.
The reason is since the early 90's, a large number of active managers have shifted towards becoming "closet indexers" or "sector rotators". In effect, 70% of funds are either indexed or became "closet indexers" since many have moved towards their "Morningstar style box". It stand to reason the lowest cost provider that indexes wins this game.
A few years ago, two Yale researchers Martijn Cremers and Antti Petajisto researched over 2,500 money managers from 1980-2006. They showed there are 4 types of money managers, "high active share diversifiers", "high active share concentraters", "low active share closet indexers" and "low active share sector rotators". I won't bore you with the calculations but you're more than welcome to read their study. Basically, "active share" ranges from 0%-100% with those at 0%, in effect, replicating an index while those at the opposite end truly picking stocks. Active equity mutual funds in the U.S. ranges from 30% to 100%, with an average of 66% for large-cap funds.
Anyhow, "active share" is something I've been directly using since the study and indirectly utilizing for longer than that by eyeballing it without the research or technology to back it up.
The bottom line is those with a "high active share" (70%+ but 80% is better) have significantly added value to their shareholders. After fees and transaction costs, the outperformance, on average, is around 1.5% per year whereas it's no surprise "closet indexers" and "sector rotators" underperformed significantly. In fact, the study found that there's no correlation between fund returns and fees and expenses when looking at "high active share". Pretty significant considering all the press given to this.
The 6% outperformance (or alpha) of the best performing group of funds is pretty amazing and should be something all of you learn more about now that it's public. Might want to look at Morningstar's list for future reference and what the "active share" is regarding a cap-weighted index.
Mise--on a sidenote I am using hedge fund ETF's for a multitude of reasons if you're interested in hearing more.
http://mfi.morningstar.com/BlogList.aspx?month=7&year=2010
Conventional wisdom says that active money managers can't outperform passive indexes. In fact, there are plenty of studies which shown that the average active portfolio manager do not outperform either the Capital Asset Pricing Model, or passive benchmark indexes.
The reason is since the early 90's, a large number of active managers have shifted towards becoming "closet indexers" or "sector rotators". In effect, 70% of funds are either indexed or became "closet indexers" since many have moved towards their "Morningstar style box". It stand to reason the lowest cost provider that indexes wins this game.
A few years ago, two Yale researchers Martijn Cremers and Antti Petajisto researched over 2,500 money managers from 1980-2006. They showed there are 4 types of money managers, "high active share diversifiers", "high active share concentraters", "low active share closet indexers" and "low active share sector rotators". I won't bore you with the calculations but you're more than welcome to read their study. Basically, "active share" ranges from 0%-100% with those at 0%, in effect, replicating an index while those at the opposite end truly picking stocks. Active equity mutual funds in the U.S. ranges from 30% to 100%, with an average of 66% for large-cap funds.
Anyhow, "active share" is something I've been directly using since the study and indirectly utilizing for longer than that by eyeballing it without the research or technology to back it up.
The bottom line is those with a "high active share" (70%+ but 80% is better) have significantly added value to their shareholders. After fees and transaction costs, the outperformance, on average, is around 1.5% per year whereas it's no surprise "closet indexers" and "sector rotators" underperformed significantly. In fact, the study found that there's no correlation between fund returns and fees and expenses when looking at "high active share". Pretty significant considering all the press given to this.
The 6% outperformance (or alpha) of the best performing group of funds is pretty amazing and should be something all of you learn more about now that it's public. Might want to look at Morningstar's list for future reference and what the "active share" is regarding a cap-weighted index.
Mise--on a sidenote I am using hedge fund ETF's for a multitude of reasons if you're interested in hearing more.
