Is high active share always good?

Giuliano De Rossi () and Gurvinder Brar ()
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Giuliano De Rossi: Macquarie
Gurvinder Brar: Macquarie

Journal of Asset Management, 2018, vol. 19, issue 7, No 3, 460-471

Abstract: Abstract More and more asset managers are committing to an explicit active share target, which takes the form of a lower bound (e.g. at least 75%) or a range of values (e.g. between 75 and 85%). The active share target is used either in conjunction with, or as a substitute for a tracking error limit. We analyse the implications of active share targets on the portfolio construction process using a simple optimisation framework. Our results suggest, counter to conventional wisdom, that in certain situations the portfolio construction process benefits from imposing a limit on active share rather than from boosting active share. In particular, if the signal used in a strategy is weak, then a constraint on active share can help mitigate the effects of model uncertainty.

Keywords: Active share; Portfolio management; Portfolio optimisation; Estimation error (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1057/s41260-018-0096-5

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