Largest funds’ active shares dip despite greater scrutiny

Largest funds’ active shares dip despite greater scrutiny
Change in active share for largest 10 members

The active share of the UK’s largest retail funds has fallen over the past decade despite increased scrutiny of the extent to which active managers deviate from their benchmarks, new figures show.

Data compiled for Investment Adviser by Morningstar, spanning equity funds investing in the UK, US, Europe, emerging markets and globally, indicates that active shares for 31 of the 50 largest portfolios have dropped over the 10 years to March 31 2017.

The figures come at a time of increased pressure on active managers to show they are offering a different approach – and potential outperformance – when compared with benchmarks and the cheaper passive vehicles that follow them.

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As a result, a number of asset managers have sought to highlight their active share ratios to fund buyers, many of whom are increasingly factoring in the metric to their selection decisions.

Although most funds in the analysis have an active share over 60 – the level below which funds are considered by some to be “closet trackers” of an index – the dip may indicate the pressures faced by larger funds to distinguish themselves from indices.

Architas investment director Adrian Lowcock said: “It’s more challenging to do something different to the market if you are such a large fund. As a large fund, you don’t want to take too much exposure in an individual company, so you have to sacrifice a bit of that small and mid-cap exposure.”

Sophie Muller, head of research at EQ Investors, said: “If you were to look further down the market cap, and in terms of fund size, you would typically see funds that have a higher active share. It’s something we look at very closely.

“We don’t want to see funds that have generated good performance from high active share [only for this to] deteriorate when assets come in.”

Regulators are taking a closer interest in the subject. In June, the FCA reiterated concerns that more than £100bn sits in funds that appeared to closely follow the market but charge “active” prices, although it did not seek to resolve the issue directly.

Ryan Hughes, head of fund selection at AJ Bell Investments, said a renewed focus on the metric was justified.

“Demonstrating value for money is going to be an increased focus for managers. If you invest differently to the benchmark, you are at least giving yourself a chance to perform differently to the benchmark. That’s what investors are paying you for,” Mr Hughes said.

A more concerted crackdown on closet trackers could be expected to drive active share up, Mr Lowcock suggested.

“As a light shines on these closet trackers more, you could see them close or restructure and that could increase active share. It’s the low-hanging fruit,” he said.