Active Share and the Three Pillars of Active Management : Skill, Conviction and Opportunity

We introduce a new formula for Active Share that emphasizes that a fund's Active Share is only reduced through overlapping holdings with its benchmark. Next, we relate Active Share to the fund manager's individual stock picking skill, conviction and opportunity. We show why and how to adjust the expense ratio for the level of Active Share and the cost of investing in the benchmark. We conclude that Active Share matters for actively managed funds: investors should not pay (too) much for low Active Share funds which generally underperform, there is no evidence that high Active Share funds as a group have underperformed, while patient managers with high Active Share have been quite successful.Online appendix can be found at: "https://ssrn.com/abstract=2891047" https://ssrn.com/abstract=2891047