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Directors Can Gain Insight on Funds from Active Share Disclosure

The New York Attorney General recently concluded an investigation into mutual fund fees and disclosures, which resulted in over a dozen mutual fund firms agreeing to publish Active Share information on their websites for their actively managed equity funds available to U.S. investors. According to K.J. Martijn Cremers, a professor at the University of Notre Dame who authored much of the research, Active Share represents a percentage of fund holdings that is different from the benchmark holdings. Cremers’s research has shown that, as a group and over fairly long periods of time, funds with low Active Share have tended to underperform their benchmarks net of costs, and funds with high Active Shares have tended to outperform their benchmarks net of costs.The NYAG found that many of the firms it surveyed offered professional and institutional investors access to Active Share information but did not provide retail investors with the same access. While it remains debatable whether Active Share disclosure will be particularly useful for retail investors, fund directors may wish to monitor their fund’s Active Share relative to other funds with the same benchmark, expenses and size. Questions boards may wish to consider asking management include: Is the fund’s Active Share consistent with fund profile and fees? Is the adviser charging active fees for passive management? Is the fund expected to underperform?