Why active share will matter even more going forward...

Stephen Groff's picture

Just before summer decided to finally arrive, I was able to get out and visit a number of Cambridge supporters from coast to coast. While it is always nice to talk about what we have been up to, it’s also nice to hear what is on their minds. One item that kept getting brought up was “CRM 2” and what it could mean for the industry.

CRM 2 refers to the upcoming regulation which impacts fee disclosure, performance reporting, as well as a number of other items. When fully implemented, clients will see exactly how much they are paying (in dollars). As with any period of change, there is considerable uncertainty out there as everyone involved is trying to better understand how this will play out. As we have seen in the U.K. & Australia, there will be those that come out ahead and those that fall behind.

I believe there will be a major shift in the industry surrounding a very important topic we have been discussing from the day we joined Cambridge – active share. Active share refers to how different a fund is from a benchmark. An ETF should be close to 0%, while a fund with no overlap would be 100%.

We have always contended that it is impossible to do better than average when you own the same thing as everyone else. It should not be a surprise that many of the largest funds across Canada have very similar holdings as each other and the index. This reduces the Portfolio Managers odds of losing their job if they are wrong – after all, you won’t get fired owning Royal Bank! This behavior has been noted in studies, including one showing active share among funds in the U.S. has fallen from >80% in the 1990’s to roughly 50% over the last 20 years (as reported in an “Active Share and Mutual Fund Performance” study by Antti Petajisto in January, 2013).

At Cambridge, we do not care about owning what is in an index because we are large owners of our own funds and instead care about absolute, not relative, returns. Greg posted on this topic earlier which showed active share across Cambridge funds typically being in the 85-95% range.

I suspect CRM 2 will raise client awareness and spark a lot of discussion on the value they are getting for their fee dollars. Greater awareness is likely to divide the industry into “cheap beta” and “alpha” segments, while “ETF-like” mutual funds will be stuck in the middle. As active managers, we look forward to building our partnership with brokers & advisors who share our philosophy on the value of actual active management.

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