Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently

This paper documents that among high Active Share portfolios – whose holdings differ substantially from the holdings of their benchmark – only those with patient investment strategies (i.e., with long stock holding durations of at least 2 years) outperform their benchmarks on average. Funds trading frequently generally underperform, regardless of Active Share. Among funds that infrequently trade, it is crucial to separate closet index funds – whose holdings largely overlap with the benchmark – from truly active funds. The average outperformance of the most patient and distinct portfolios equals 2.30% per year – net of costs – for retail mutual funds. Stocks held by patient and active institutions in general outperform by 2.22% per year and by hedge funds in particular by 3.64% per year, both gross of costs.