Active share, fund style and performance

Abstract

The South African unit trust industry was found to display low levels of Active Share compared to international levels. A sample of unit trusts, representing approximately 58.2% of assets under management in the South African general equity fund industry, was selected based on the availability of the information necessary to perform this analysis. The average Active Share demonstrated by the sample of unit trusts has decreased from 60.85% in June 2007 to 55.65% in June 2013. A fund flow analysis confirmed that fund managers' portfolio decisions are highly affected by the risk of outflows and possibility of inflows. Managers faced with a high risk of outflows and low possibility of inflows adjusted their Active Share by approximately double that of managers with a moderate risk of outflows and inflows. A similar result was found when comparing managers experiencing a low risk of outflows and a high possibility of inflows, to managers experiencing a moderate risk of outflows and inflows. Under varying market conditions, unit trusts exhibiting the highest Active Share and tracking error (concentrated stock picker) earned a significantly higher alpha than unit trusts exhibiting the lowest Active Share and tracking error (closet indexer). During the financial crisis and in the subsequent bull market to previous highs, concentrated stock pickers earned a significantly higher alpha than closet indexers. In bull markets breaking through previous highs, concentrated stock pickers earned the lowest alpha. The alpha earned by unit trusts exhibiting the highest level of Active Share was significantly higher than the alpha earned by unit trusts exhibiting the lowest level of Active Share. The benefit of distinguishing between truly active (concentrated stock picker) unit trusts and closet indexer unit trusts is clear.