Cremers+Petajisto+RFS+2009 - How Active Is Your Fund...

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How Active Is Your Fund Manager? A New Measure That Predicts Performance K. J. Martijn Cremers International Center for Finance, Yale School of Management Antti Petajisto International Center for Finance, Yale School of Management We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings. We compute Active Share for domestic equity mutual funds from 1980 to 2003. We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Active Share predicts fund performance: funds with the highest Active Share signi±cantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Nonindex funds with the lowest Active Share underperform their benchmarks. ( JEL G10, G14, G20, G23) An active equity fund manager can attempt to outperform the fund’s benchmark only by taking positions that are different from the benchmark. Fund holdings can differ from the benchmark holdings in two general ways: either because of stock selection or factor timing (or both). 1 Stock selection involves picking individual stocks that the manager expects to outperform their peers. Factor timing involves time-varying bets on systematic risk factors such as entire industries, sectors of the economy, or more generally any systematic risk relative to the benchmark index. Because many fund managers favor one approach over the other, it is not clear how to quantify active management across all funds. We wish to thank Nick Barberis, Jonathan Berk, Lauren Cohen, Roger Edelen, Frank Fabozzi, Andrea Frazzini, Will Goetzmann, John Grif±n, Marcin Kacperczyk, Owen Lamont, Juhani Linnainmaa, Ludovic Phalippou, Andrei Shleifer, Clemens Sialm, Matthew Spiegel, Russ Wermers, Lu Zheng, and Eric Zitzewitz for comments, as well as conference and seminar participants at the AFA 2007 Annual Meeting, CFEA 2006, CRSP Forum 2006, EFA 2007 Annual Meeting, FRA 2006 Annual Meeting, NBER Asset Pricing Meeting, NYU Stern Five- Star Conference, AllianceBernstein, Barclays Global Investors, Goldman Sachs Asset Management, Morningstar Investment Conference, Super Bowl of Indexing, Federal Reserve Bank of New York, Securities and Exchange Commission, Amsterdam University, Baruch College, Boston College, Helsinki School of Economics, ISCTE Business School (Lisbon), Tilburg University, University of Chicago, University of Maryland, University of Texas at Austin, University of Vienna, and Yale School of Management. We are also grateful to Barra, Frank Russell Co., Standard & Poor’s, and Wilshire Associates for providing data for this study. Send correspondence to Antti Petajisto, Yale School of Management, PO Box 208200, New Haven, CT 06520-8200; telephone: (203) 436-0666. E-mail: Web page:
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This note was uploaded on 11/27/2011 for the course FINA 3104 taught by Professor Darwin during the Spring '11 term at HKUST.

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Cremers+Petajisto+RFS+2009 - How Active Is Your Fund...

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