Practical Applications of Using Active Share to Evaluate Single- and Multi-Manager Portfolios

Abstract

In Using Active Share to Evaluate Single- and Multi-Manager Portfolios, in the April 2020 Fund Manager Selection special edition of The Journal of Portfolio Management, Mark Higgins, Matthew Sturdivan, Janelle Booth, and Claire Illo, all of RVK, Inc., consider the use of active share to evaluate investment strategies and to select and monitor individual equity managers. Active share statistically measures the difference between a fund manager’s portfolio holdings and the weightings of the fund’s benchmark index. The authors analyze how investors can apply active share when assessing their strategies and managers’ performance and thereby improve their manager selection and portfolio building. Using a simulation approach to evaluate multi-manager US large-cap equity portfolios, the authors show how active share can help quantify the impact of managerial diversification on the quality and efficiency of multi-manager portfolios. They also demonstrate how investors can establish a conditional ideal number of managers for a portfolio. They note, however, that active share has several limitations and should be coupled with other quantitative and qualitative analytical measures to build multi-manager portfolios. TOPICS: Manager selection, performance measurement