Warning over active share smokescreen

Hermes Investment Management has warned investors against placing too much reliance on active share as an indicator of a fund’s ability to outperform against a benchmark.

In a new paper, Looks like a lion, manages like a lamb, Hermes found that the use of a single portfolio metric, such as active share, does not give a full and accurate picture of a fund’s performance. In particular, a fund with a high active share measure picked by an unskilled manager is more likely to significantly underperform. Hermes head of investment office, Eoin Murray, commented: “Just using active share as a measure [of a manager’s conviction] is a gross oversimplification. It can only really be considered in the context of other factors, such as tracking error, to give an indication of how skilled a manager is and, therefore, how they might be expected to perform in the future. Without the presence of skill, a manager that looks like a lion based on their active share, might actually manage like a lamb.”