Investors in actively managed equity mutual funds pay higher fees on the premise that the fund manager is doing something different than the index—picking stocks, sizing bets, and deviating from the benchmark to generate outperformance. Active share is a simple metric that helps investors check whether their fund manager is taking real active positions or largely sticking to the benchmark index.
Active share measures how different a fund's portfolio is from its benchmark index, expressed as a percentage between 0% and 100%. A score of 0% means the portfolio is an exact replica of the index, while 100% means the fund holds nothing in common with it. Put simply, it tells you what portion of the fund's money is invested differently from the benchmark.
As a rough guide, an active share of 10% would indicate that 90% of the fund more or less mimics the benchmark index. An active share of 80% means that only 20% of the fund is similar to the index, while the remaining 80% deviates from it.
The calculation works like this. Compare the weight of every stock in the fund with its weight in the benchmark, take the absolute difference for each, add them, and divide the total by 2.
Suppose a fund's benchmark has just four stocks: A at 40%, B at 30%, C at 20% and D at 10%. The fund holds A at 25%, B at 30%, doesn't have expoure to C and holds D at 20%, and a non-index stock E at 25%. The differences are: 15 percentage points on A, zero on B, 20 on C (which the fund skipped entirely), 10 on D, and 25 on E. These add up to 70. Divide by two, and the active share is 35%—meaning 35% of the fund's portfolio is invested differently from the index.
As most Indian fund houses do not disclose active share in their factsheets, investors can compute it from the monthly portfolio disclosures that mutual funds are required to publish.
However, active share is not the only metric that the investor should rely on. A high active share doesn’t necessarily mean that the fund is likely to outperform.
The fund may still underperform the index. Fund performance ultimately depends on the quality of the fund manager’s stock picks. A fund with almost nothing in common with the index can still be a poor performer if its investments perform poorly.
High active-share funds thus don’t offer any guarantee of outperformance. If a fund has high active share but is still consistently underperforming, an investor may want to consider moving out of such a fund.