ACTIVE SHARE: IMPLICATIONS FOR ACTIVE PORTFOLIO MANAGEMENT

Abstract

This thesis investigates the practical implications of active portfolio management using active share. We describe active share and highlight its merits and limitations. We also explore the potential applications of active share into fund selection process and manager performance appraisal in relation to stock-picking ability. We present our work into three independent papers. Our first paper analyses the flow-active share relation and attempts to determine whether high active share funds are positively related to fund flows. Using US equity mutual fund data, we find a statistically significant relationship between fund flows and active share. We also find this relationship to be stronger amongst institutional fund type. Our second paper represents the first attempt in academic literature to examine the relationship between active share and European equity fund performance. As part of this study, we analyse the interaction effect between Central Bank’s policy and fund performance in order to gauge whether the active share-performance depends in part upon changes in monetary policy. We conduct this analysis by assessing the active share-tracking error and active share-investment style interactive effects. Using a sample of European equity funds, we find a positive and significant relationship between active share and performance. Our results show a stronger relationship amongst stock-picking strategy. We report a statistically significant interaction effects between active share and both, tracking error and investment style. These effects are stronger between higher active share funds with higher tracking error, and lower active share funds with growth style. These funds exhibit the highest means. Finally, we find a positive relationship between Central Bank’s policy and performance, which is in line with existing literature. Our third and final paper examines active portfolio management across market conditions i.e. during a bear and a bull market, by measuring active share trends. Using a sample of US mutual funds, we test whether high active share funds’ level of activeness increases during periods of market distress. We find evidence suggesting that this relationship strengthen among high active share funds in a bear market. We also find that irrespective of the active portfolio management strategy followed by a fund, on average, actively-managed funds outperform in a bear market.

Date of Award	31 Dec 2020
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Marie Dutordoir (Supervisor) & George Wang (Supervisor)