Many experts believe it doesn’t make sense to invest in actively managed mutual funds. They say there is not a substantial enough difference between the returns that index and actively managed funds generate to justify active managements higher fees. I believe that true active management still works. It is just a matter of screening out those actively managed funds masquerading as index funds — the closet indexers.
Recently, Antti Petajisto, former NYU assistant professor and now vice president for BlackRock’s multi-asset strategies group and Yale Professor Martijn Cremers authored a paper which introduced the mutual fund management concept of “active share.” Active share can best be described as the extent to which managers deviate from the allocations within a funds benchmark. For example, if a fund manager decides that Apple has become overvalued and underweights the stock and decides to overweight Google, this will create a deviation from the funds benchmark. Greater deviation results in a higher active share value.
