The trucking industry is worth hundreds of billions of dollars per year. Uber is going after this market with Uber Freight, an online platform that matches truckers with...Technologyread more
Drone strikes attacked an oil processing facility at Abqaiq and the nearby Khurais oil field on Saturday.Marketsread more
Trump said oil would be released if needed to keep the market well supplied and he would expedite the approval of pipelines in Texas and other states.Marketsread more
Saudi Aramco is aiming to restore by Monday about a third of its crude output that was disrupted after drone attacks on two key oil facilities, The Wall Street Journal...Marketsread more
Apple's new iPhones can still send texts, download apps, and make video calls, but the company spends a lot of time and effort marketing its new phones as powerful photography...Technologyread more
Some U.S. manufacturers say tariffs, if targeted, will help address longstanding unfair trade practices like intellectual property theft.Traderead more
Supporters of a $15 minimum wage ballot initiative in Florida argue the state's inflation-tied pay hikes have not gone far enough.2020 Electionsread more
Saudi Arabia shut down half its oil production Saturday after drone strikes hit the world's largest oil processing facility in an attack claimed by Yemen's Houthi rebels.Politicsread more
Trusii's hydrogen water machines were supposed to help users with their health problems, but customers claim the company is involved in a giant scam.Technologyread more
The decoupling of the world's two weightiest economies seems as inescapable as its extent and global impact remains incalculable.Politicsread more
BlackBerry has reinvented itself to become a leader in securing mobile communications and in embedded communications. Next year it plans to roll out new products. CEO John...Evolveread more
Are you paying your active fund manager four times more than an index fund to essentially mimic the benchmark?
It's called closet indexing. Active managers do it because they don't want to lag too far behind the herd for fear of losing their jobs or their funds have gotten so big that they can't help but track the market.
"[Active managers] underperform because of industry pressures to grow huge and hug an index," said Karl Frank, a certified financial planner and president of A&I Financial Services in Englewood, Colorado.
Closet indexing can hurt investors because active funds typically have higher fees than passive funds. Last year, the asset-weighted average expense ratio for passive funds was 0.18 percent compared with 0.78 percent for active funds, according to mutual fund researcher Morningstar.
The pressure to cling to the benchmark also has increased because funds linked to stock indexes generally have performed better than funds using stock pickers. A majority of active equity funds have underperformed their passive counterparts in nearly every category over the past 10 years. (See table below.)
There are two ways you can find out if your manager is a closet indexer — tracking error and active share.
Tracking error is the difference between a fund's performance and its benchmark's performance. That data is readily available when you look at a fund's returns online. A low tracking error suggests an active fund's manager is essentially mimicking the index. (Even passive funds have tracking error because managers can't perfectly match an index's performance.)
Active share is the percentage of a portfolio's holdings that differ from the benchmark index. A higher percentage here may mean the fund manager is trying to beat the index with his or her stock picking skill. A fund with a 100 percent active share percentage would mean that it did not have any holdings in common with its benchmark.
A website run by Martijn Cremers, a University of Notre Dame finance professor, calculates the active share of U.S. mutual funds for free.
The two metrics used together can show whether a fund manager is a closet indexer.
Research from Cremers and Antti Petajisto, a portfolio manager at hedge fund LMR Partners, found that funds with high active share percentages have outperformed their benchmarks — even after fees — while closet indexers underperformed.
Despite the research by Cremers and Petajisto, active share may not be a good predictor of future performance.
Funds with high active share didn't outperform their peers in a five-year period that ended in December 2015, according to an analysis from Russel Kinnel, Morningstar's director of manager research.
"Active share is a good descriptor of a fund, but not a good predictor of performance," said Kinnel, who keeps tabs on active share to see if fund managers are changing their strategies.
His findings echoed those from researchers at investment management firm AQR Capital. They concluded that "active share may not be useful for predicting outperformance, but it may well be useful for evaluating costs. Fees matter and we believe they should be in line with the active risk taken."
So if you want to pick an active fund that will beat its benchmark, fees are a better place to look than active share. Kinnel found that cheap funds are more than three times as likely to outperform than high-cost funds.