Most investors aren’t aware that their money is increasingly being managed by less active fund managers to the detriment of investment returns.
Closet indexers claim to be active and charge a higher fee for active management but in reality just closely resemble a passive index. The problem for investors is that a manager who generates returns similar to an index and charges higher fees will, by design, underperform.
Closet indexers claim to be active and charge a higher fee for active management but in reality just closely resemble a passive index. The problem for investors is that a manager who generates returns similar to an index and charges higher fees will, by design, underperform.
From the early 1980s to today, closet indexers have ballooned from under 5% to more than 30% of mutual fund assets* (U.S. figures). We believe investors and their advisors should avoid these managers because they’re paying for something they aren’t getting, namely value.
A must-have to outperform
We also promote active share as a means to identify and track true active managers. Active share measures the difference in holdings and weights between a fund and its index. The higher a fund’s active share number, the more it departs from its index based on the selection of businesses in its portfolio.
Funds with the highest active share have been shown to outperform their index by 3.64% annually. In stark contrast, closet indexers underperformed by -0.13% over the same timeframe†.
Quality at a low price
Where does EdgePoint fall on the active share spectrum? With a 97% active share, EdgePoint Global Portfolio is considered highly active.
EdgePoint Canadian Portfolio’s lower active share (84%) reflects the fact that Canada’s smaller market offers fewer investment choices. It’s simply harder to look different in Canada. Doesn’t mean we won’t try!
High active share plus industry-low fees is the combination you want from your actively managed fund and that’s what we aim to deliver to our investors.
We believe in hugging trees, not indexes.
Check out other measures of active management you can use to gain a better idea of what you’re paying for and whether it’s worth it.
