The great Active Share smackdown (or how to spot closet index funds)
Quote1 “… funds with a low Active Share and high management fees, what we now call closet index funds, should be avoided at all costs.”
Quote2 “First, closet index funds that charge active management fees are a poor bargain for investors. Prof. Cremers surmises that these funds continue to exist because retail investors have no easy way of identifying them in the marketplace.”
Quote3 “… if you can replicate the non-Active Share part of your portfolio with an index fund management fee of 20 basis points, then the active portion of the fund must really outperform to justify the active management fee levied on the entire portfolio. Prof. Cremers calls this the Active Fee.”
Summary Quote “… messages of enduring value … are: 1) avoid closet index funds, 2) ensure that when I pay active management fees I actually own a high Active Share portfolio and 3) within that group, to prefer managers with low portfolio turnover.”
