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Definition: Active Share Study
Active share study refers to the study conducted by researchers of Yale University in 2006. This study basically refers to the composition of the stocks in which the mutual funds invest and the comparison of this stock holdings of the mutual funds with their benchmark indices. The larger the amount of deviation observed in the composition of stock holdings, the more will be the amount of active share in the mutual fund under observation.
The findings of the active share study shows that the more the amount of active share in the composition of mutual funds, the better will be the chances of that mutual fund for outperforming or the better performance as compared to that of its benchmark index. Hence, the funds with high share of active study have better chances of giving high returns as compared to those with low share of active study.
For Example: If any mutual fund has 45% composition of active share, then it means from the total composition, 45% of the fund composition is actively managed by the mutual fund manager or the financial institution while remaining 55% composition of the mutual fund is exactly similar to that of its benchmark index.
Active share study is also helpful in identifying managers who claim that they are active managers of the portfolio held by them but in actual their portfolio remains very similar to that of the benchmark index and want to charge fees for active management. In financial parlance, these types of managers are referred to as ‘closet managers’. There are various conventional methods used for measuring the amount of active management done by the managers such as tracking error. In method basically involves calculation of standard deviation of the number which is equivalent to the difference between the returns of portfolio and its benchmark index. The higher the value of this standard deviation, the more will be the portion of active share in the portfolio.