Active Share measures the extent to which a portfolio differs from a benchmark with those scoring 80-100 percent considered to be highly active and those below 20 percent to be purely passive. The US funds scoring between 20-60 percent are the “closet indexers” which investors should avoid – they offer funds that are not sufficiently different from the benchmark to generate meaningful alpha but charge active fees.
Despite growing regulation to tackle this problem, a recent study* found that closet trackers represent a fifth of European funds while Petajisto found they accounted for around a third of US mutual fund assets with even higher growth rates than pure indexing. Active and passive managers are united on this issue; moving from an expensive closet indexer to a cheaper passive fund is a wise choice.