February 2, 2010
Martijn Cremers is an associate professor of finance at the Yale School of Management. He and his Yale colleague Antti Petajisto have conducted research that focuses on mutual fund management, and their paper, How Active is Your Fund Manager? A New Measure That Predicts Performance, has been widely cited for its role in identifying successful active managers. His work has been the focus of two articles in Advisor Perspectives, From Yale University: New Research Confirms the Value of Active Management and Compelling Evidence That Active Management Really Works.
Dan Richards interviewed Professor Cremers on January 4 at the annual meeting of the American Economic Association in Atlanta, GA. This interview is one of a series that Dan conducted at that conference, and we will provide links to videos of his other interviews. Dan is president of Toronto-based Strategic Imperatives.
Let’s start by talking about what exactly active share is.
The active share of mutual funds distinguishes those fund managers who are active managers and measures how active they really are. It then attempts to correlate that with their performance.
We set aside the passive funds. We look at the funds that claim to be active, and we try to look what they are holding in their portfolio to see how active they really are.
The previous metrics, before our active share measure, did not look inside their portfolios.
As part of our research, we compare the holdings of the supposedly actively managed portfolio to what we think is its benchmark.
What led to your research?
An article in the Wall Street Journal piqued my interest. It looked at the Fidelity Magellan fund. It measured the R-squared obtained by regressing the returns of the fund against the S&P 500. It was very close to 1.0, suggesting that Magellan was not doing very much other than benchmarking the S&P 500
This is sometimes referred to as hugging the index.
Yes. That result suggested that it was hugging the index.
But another possibility was that it was not hugging the index at all, but it was taking diversifying positions away from the index, and it was so well diversified that its portfolio still ended up with an R-squared close to 1.0, even though the holdings were still different from the S&P 500.Display article as PDF for printing.
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