Some fund groups, including Neptune and Threadneedle, have recently announced intentions to disclose their funds’ Active Share in the interests of transparency. Active Share is a portfolio metric that measures how actively managed a fund is. As such, it is an effective metric in exposing ‘closet indexation’ – or at least it would be if it was a more readily available statistic.
Many fund managers claim to be ‘active’ but in reality, a number of industry issues constrain them from pursuing a truly active strategy. To quote Neil from his submission to the Kay Review in 2012:
The tyranny of the benchmark has created an environment where fund managers are less inclined to back businesses or industries for the long-term because they are concerned with the career risk of moving too far away from their benchmark index over shorter time periods.1
Neil Woodford, 2012
In the spirit of transparency and openness, I have just calculated the CF Woodford Equity Income Fund’s Active Share2 to be:
You can read more about how this figure is calculated here but, effectively, it is the sum of all of the absolute active positions in a portfolio and its benchmark, divided by 2. For example, a portfolio position of 4.0% in Capita equates to a 3.6% absolute active position, by virtue of its 0.4% FTSE All Share Index weight. Similarly, a zero portfolio weight towards HSBC equates to a 5.5% contribution to the Active Share calculation, being that stock’s index weight.
|Stock||Fund %||Index %||Active Share %|
In short, the further away an Active Share is from 0%, the more active the fund is. You would expect an index tracker, therefore, to have an Active Share close to 0% but a high Active Share means that the performance of a fund can be very different to that of its benchmark. It doesn’t necessarily mean better performance, but academic studies have provided evidence that fund’s with an Active Share of greater than 80% do tend to produce long-term relative outperformance3. In the words of Sir John Templeton:
It is impossible to produce superior performance unless you do something different from the majority.
Sir John Templeton
We are happy for the fund’s performance to be compared to the FTSE All Share Index, even though it looks nothing like it. That is because we are confident that we can deliver better returns than the market in the long run by doing things differently.
The FTSE All Share Index is a very concentrated index. That isn’t always a bad thing, but it is an important part of our investment approach to be able to avoid parts of the market when we view them as fundamentally unattractive. The oil & gas sector, for example, accounts for well over 10% of the index. We are not exposed to the oil majors but, to put this into context, BP’s 2015 net income estimate has been revised down from £9.5bn to £5.0bn since the oil price peaked in June 2014. This downgrade alone is considerably more than the entire profit generated by the entire Small Cap component of the index (£3.2bn) in 20144.
The CF Woodford Equity Income Fund’s Active Share analysis reflects an investment approach that allows us to back our investment convictions meaningfully. We believe this distinguishes us from many other fund managers. Having more readily available analysis on Active Share would allow investors to see this distinction more clearly.
The value of the fund and the income from it may go down as well as up, so you may get back less than you invested. Past performance is not a guide to future returns.