A Primer on Active Share

In Anchor’s opinion the only way for a portfolio manager to have a chance of outperforming a benchmark is through active share. Active share is defined as the percentage of a portfolio that differs from a benchmark index. Active share measures the degree of active management in an actively managed portfolio. Index funds, which are designed to closely track a benchmark such as the S&P 500, have active share that is close to zero, while active managers generally have higher active share. A recent study featured in Financial Analysts Journal showed that high active share managers tend to outperform. Yet, since 1981, the share of assets invested in high active share strategies (active share of 80-100%) has dropped from 60% to 20%, as passive investment vehicles such as exchange-traded funds (ETFs) have gained popularity[sup]i[/sup] .

Since 2006, ETFs have seen over $1 trillion of inflows while U.S. equity mutual funds have seen over $100 billion of outflows[sup]ii[/sup]. One effect of these flows is that stocks are increasingly purchased as part of a basket. Correlations between large components of the S&P 500 have showed a significant increase between 1994 and 2014. Furthermore, it appears that in many instances, it has been the larger more liquid securities whose valuations have expanded the most[sup]iii[/sup]. As a marginal dollar enters an ETF, it does so with disproportionate weighting toward the stocks which have gone up the most, with the highest market capitalizations and in many cases the highest valuations. For a value disciplined investor we do not believe that this approach makes sense, and usually only works in a rising market with continued positive ETF flows.

At Anchor, we conduct our own research, selecting securities on a bottoms-up basis for inclusion in client portfolios. The composition of benchmarks factor little into our decision-making process. As a result, our strategies show high levels of active share and our performance can, and often does, deviate substantially from benchmarks that are used for comparison purposes.

Anchor Capital Strategies All Have High Active Share[sup]iv[/sup] (as of 6/30/16)

Anchor Strategy

Active Share


Anchor Smallcap Value


Russell 2000Value

Anchor Small-midcap Value


Russell 2500 Value

Anchor Midcap Value


Russell Midcap Value

Anchor Allcap Value


Russell 1000 Value

Anchor Select Dividend


S&P 500

Anchor Focused Value


Russell 3000 Value

Anchor Balanced


Russell 1000 Value

Anchor Enhanced Equity


S&P 500

* Calculation is for equity portion of portfolio only

Over the past thirty years, there has been a steady trend away from active management toward passive management and the amount of money that is truly actively managed is close to all-time low levels. We believe this trend has increased opportunities for active managers to add value through security selection. Active share is but one metric that investors should consider when evaluating an investment manager. It is a metric that helps to delineate true active managers from those more focused on benchmarks. Other important factors include returns over market cycles, upside and downside capture, risk and volatility (beta), risk-adjusted returns (alpha), and the philosophy, stability and longevity of the investment team.