Active Share and Benchmark-Relative Fund Holdings
Summary
The document investigates whether equities that are under-owned by institutions relative to their broad-index weights might have stronger future performance. The accepted answer identifies Active Share as a related concept: a measure of how much a fund’s holdings differ from those of its benchmark. It describes cited research as finding that, over long periods and as a group, funds with higher Active Share tended to outperform their benchmarks after costs, with the reported pattern strongest among less frequently trading funds, small-cap funds, and funds with lower assets under management.
Active Share measures portfolio differentiation, not investment skill, and the answer concerns fund-level holdings rather than directly establishing that under-owned individual stocks will outperform. The document provides no research design, data, estimates, or details about the cited studies, and its initial question and answer are not fully equivalent. Readers should treat the reported association as a research lead, not as proof of a stock-selection anomaly or a standalone forecast.
Key ideas
- Active Share measures how differently a fund is positioned from its benchmark.
- The answer reports an association between higher Active Share and benchmark outperformance after costs over long periods.
- The reported association is described as stronger for some fund types and trading patterns.
- Active Share is a measure of portfolio differentiation, not skill.
- Fund-level Active Share does not directly test whether institutionally under-owned stocks outperform.
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Full text
# Possible correlations to institutional allocations versus market capitalization # Possible correlations to institutional allocations versus market capitalization I seem to remember someone telling me a while back that a good indicator of future equity performance was how "institutionally under-owned" a given equity is versus its weight in a given broad market index (e.g., Russell 3000). I cannot seem to remember the terms he used, but I do remember he cited academic research as supporting this premise. I cannot find very much literature on this topic and/or data to support the claim. Can anyone point me to a paper or resource on this potential market anomaly? ## Answer by David Addison (score 0, accepted) https://quant.stackexchange.com/a/36754 I actually found that what I was looking is referred to as "Active Share". According to ActiveShare.info: > Active Share is the percentage of fund holdings that is different from the benchmark holdings... Active Share is not a measure of skill but rather measures how different the fund's holdings are relative to the holdings of the particular benchmark considered... Research has shown that as a group and over fairly long periods of time: funds with low Active Shares have tended to underperform their benchmarks net of costs funds with high Active Shares have tended to outperform their benchmarks net of costs, especially among funds that do not trade frequently, among small cap funds and among funds that do not have very large assets under management (see further the section 'Active Share Research') ...The papers below, co-authored by Martijn Cremers, provide further background and explanation. For more information on his academic research on Active Share, see activeshare.nd.edu. The website also offers a search tool to determine a given fund's active share versus the S&P 500.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.