Fund Manager Conviction, Active Share, and Future Fund Performance
Summary
The article summarizes research that uses active share, or portfolio deviation from a benchmark, as a proxy for a fund manager’s conviction. It reports that strong past performance is associated with subsequent increases in active share, particularly for individually managed funds. The relationship between active share and future risk-adjusted performance is described as an inverted U: both very low and very high conviction are linked to weaker results, while high active share is also associated with greater performance extremes and residual risk.
The summary draws on a large panel of US active equity mutual funds spanning 1980–2009 and describes regression analyses controlling for fund characteristics, investment style, and time. It also reports asymmetric investor flows: positive past performance attracts more money to high-active-share funds, while poor performance does not produce a proportionately greater outflow from them. These are historical associations, and active share is an indirect measure of conviction rather than a direct psychological observation. The evidence is specific to the sampled US funds and period, so it does not establish a universal causal rule.
Key ideas
- The study treats benchmark-relative active share as a proxy for fund manager conviction.
- Past strong performance is associated with later increases in active share, especially in individually managed funds.
- Future performance has an inverted-U relationship with active share in the reported analysis.
- Higher active share is associated with more extreme outcomes and greater residual risk.
- Investors respond more strongly to good past performance at high-active-share funds than to poor performance with equivalent outflows.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.