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Active share

Active Share measures the extent to which a portfolio differs from a benchmark with those scoring 80-100 percent considered to be highly active and those below 20 percent to be purely passive. The US funds scoring between 20-60 percent are the “closet indexers” which investors should avoid – they offer funds that are not sufficiently different from the benchmark to generate meaningful alpha but charge active fees.

Despite growing regulation to tackle this problem, a recent study* found that closet trackers represent a fifth of European funds while Petajisto found they accounted for around a third of US mutual fund assets with even higher growth rates than pure indexing. Active and passive managers are united on this issue; moving from an expensive closet indexer to a cheaper passive fund is a wise choice.

* Active Share in European Equity Funds, Morningstar, 2016

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Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager's skill, the fund's risk profile and management fees. The return may become negative as a result of negative price developments.