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In a world of benchmark huggers, active share offers a bespoke stockpicking solution for outperformance

Contrarian Active share

There are many different ways to assess a fund, but no single one can exclusively and conclusively determine its ability to outperform the respective benchmark.

Active share has come into the spotlight during the past couple of years as active managers try to justify their loftier fees versus cheaper passive funds. The average active fund fee is 65bps against 10-15bps charged by the average passive fund.

Picking process

For those less familiar with active share, it is a measure of the percentage of stock holdings in a portfolio that differ from its benchmark index. This can be higher due to off-benchmark holdings or simply by having larger or reduced levels of exposure in an index constituent.

A fund with high active share will have significantly deviated from the index, whereas a passive fund closely tracks the index.

To illustrate how these approaches differ we can use the FTSE All-Share index as an example. It is used by a large proportion of UK funds to benchmark against and is composed of 634 constituents, with the top-10 stocks accounting for 34% of the index, as shown in the table (see page 33).

A passive fund will match the number of holdings and weightings, and therefore track its performance.

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