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Should You Care About Active Share

A Portfolio Construction Study

”Active Share” has been widely credited as a predictor of manager skill. Initial academic research has shown that active managers with high Active Share and low Tracking Error enjoyed persistent outperformance. Conversely, managers with low Active Share scores and low Tracking Error were labelled “closet indexers” and have recently become the subject of regulatory scrutiny.  But how reliable is Active Share as a single metric?  Not all researchers agree on the answer.  In this Research Insight, we have experimented with simulated strategies and tested them under various conditions and constraints — akin to doing research in a controlled laboratory environment — to identify the true drivers of Active Share.