Active Share is not a Predictor of Fund Performance

At a time when fund expenses are increasingly under scrutiny, some have turned to active share (the level of correlation between an index fund and its benchmark) as a predictor of fund performance and a means of justifying hefty management expenses. A higher active share (on a scale of 0 to 100) means a fund bears less resemblance to its benchmark. Some would argue that this indicates a higher level of active management, a higher probability of stronger returns and, therefore, a basis for higher fees. Russel Kinnel, director of manager research for Morningstar, disagrees. By breaking down U.S. equity […]

What are Investor Returns, Really?

There is some confusion around why the total investor return data published by Morningstar differs from the returns that investors are actually earning. Russ Kinnel, director of manager research for Morningstar, unravels the discrepancy. Investors’ actual returns, explains Kinnel, are the dollar-weighted returns that reveal how well investors used the fund and how well they timed their transactions. If, for example, investors buy into a fund because it’s showing great returns, this flood of dollars would result in actual investor returns falling below the fund’s published total returns. Since markets are cyclical, factors that once worked well (and bolstered returns) […]