Active share on the JSE

Abstract

Fund managers earn a portion of their fees by out-performing a benchmark, typically an index. To out-perform, they may leverage the fund or engage in scrip lending, but usually they “stock-pick”, taking positions in the market which differ from those of the benchmark, namely: “active share”. Several factors in the fund’s mandate may constrain the level of active share in a fund, inter-alia: limits on specific equities or sectors, tracking error constraints around the benchmark or limits on short-selling. We find that the percentage of active share on the JSE has declined from around 50% to 15% over the last 20 years, which is consistent with research elsewhere. This indicates that fund managers are unable or unwilling to take active positions. In contrast to other studies, we find no relationship between the level of active share and a fund’s return, raising doubts about the stock picking ability of fund managers. Finally, we observe that some index-tracking funds (with low active share) consistently out-perform around 80% of domestic general equity funds on the JSE over five-year holding periods. These findings challenge the high fees charged by many fund managers.