Active share — a new metric — can help assess the effectiveness of an active investment manager. The LPL Research team uses a variety of statistics and portfolio metrics to evaluate active investment managers, and active share is a more recent tool to help achieve that objective. The use of active share can help identify three things:
1.How much of an active investment manager’s performance is due to skill rather than luck or other extraneous factors
2. The propensity of an active manager to outperform a benchmark over the long term
3. Whether the value added of investment management is worth the management fee charged
large cap value strategy is benchmarked to the domestic Russell 1000 Value Index. ACME’s investment team decides to invest 20% of the strategy’s portfolio in international ADRs (American depository receipts), which are not included in the Russell 1000 Value Index. This internationalexposure will increase the strategy’s active share, but it will also make the statistic less reliable in assessing manager skill versus a domestic benchmark….