One of the most common New Year’s resolutions—especially for people (like me) who tend to overindulge during the holiday season—is to lose weight by dieting. In an attempt to meet this pledge, some people go on extreme diets promising weight loss, health, and happiness. While some of the aspects of these trendy diets are beneficial—fewer carbs, less sugar, more fruits and vegetables—none of them on their own will lead to good health. Some can even put your health in danger. In the same vein, investors have long been tempted by the elusive aspiration of market outperformance. Over the years some have thought past performance or fund rankings were shortcuts that foreshadowed outperformance. Our research has shown otherwise.¹

These days active share—a specific way to measure how different a portfolio is from its benchmark—is being used in efforts by advisors to determine which funds are more likely to outperform in the future. Defined as the percentage of a portfolio that differs from a benchmark index, active share can range from 0% to 100%. An index fund using full replication of its benchmark has an active share of approximately 0%, while a portfolio with no holdings in common with its benchmark would have 100% active share.

Previous studies claim that the higher a portfolio’s active share, the higher its perceived chance of outperformance.² As illustrated in the chart below, however, a high chance of outperformance comes with an equally high chance of underperformance.


This often then begs the question, what about risk-tolerant investors who are willing to accept performance volatility to potentially beat the market? Can active share help them choose winning funds? To find out, we identified actively managed U.S. equity funds that ended 2009 with active share of at least 80% and recorded top-quartile performance during a five-year evaluation period (2005–2009). We then calculated the funds’ cumulative excess returns over a five-year performance period (2010–2014). As shown in the chart below, we found significant underperformance in the subsequent five-year period. The cumulative excess return generated in the first five years was eliminated by the end of the ten-year period. These results indicate active share is much more of a tracking error or distribution of returns than a reliable gauge of outperformance.


Most of us would benefit if we consumed fewer carbs and less saturated fat, while eating more fruits and vegetables. Unfortunately, a healthy diet alone does not guarantee weight loss, health, and happiness. To reach that blissful state, reduced stress and regular exercise would also help. The story is similar with active share and investors’ search for outperformance. By itself, this trendy analytic tool cannot guarantee positive results.³ Like yo-yo dieting—given that active share is a measure of deviation, not performance—we should question active share’s long-term sustainability.

Since this is the time of the year that you usually evaluate options for clients’ portfolios, you should use active share as part of a broader evaluation of a fund’s pros and cons. You should consider a potential investment’s costs as the starting point. Also necessary when evaluating actively managed funds are careful analysis of the sources of active share and qualitative judgment regarding the health of the investment manager and depth of the analytic team.

Lastly, you should counsel your clients that patience is necessary, because returns are inconsistent, even for managers that outperform over the long term.4

I would like to thank Yan Zilbering for his contribution to this blog post.

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1 See, for example, Vanguard’s Principles for Investing Success (2014) and the Vanguard research note Quantifying the impact of chasing fund performance (Wimmer, Wallick, and Pakula, 2014).

2 K.J. Martijn Cremers and Antii Petajisto, 2009. How active is your fund manager? A new measure that predicts performance. Review of Financial Studies 22(9): 3329–65.

3 For a more in-depth discussion, see the Vanguard white paper The search for outperformance: Evaluating ‘active share’ (Schlanger, Philips, and LaBarge, 2012).

4 For more information about Vanguard’s approach to evaluating active managers, see the white paper Keys to improving the odds of active management success (Wallick, Wimmer, and Balsamo, 2015).


We analyzed funds with the following primary prospectus benchmarks: Dow Jones U.S. Total Stock Market Index, MSCI US Prime Market 750 Index, MSCI US Small + Mid Cap 2200 Index, MSCI US Small Cap 1750 Index, MSCI US Small Cap Growth Index, Russell 1000 Index, Russell 1000 Growth Index, Russell 2000 Index, Russell 2000 Growth Index, Russell 2000 Value Index, Russell 2500 Index, Russell 2500 Growth Index, Russell 2500 Value Index, Russell 3000 Index, Russell 3000 Growth Index, Russell 3000 Value Index, Russell Microcap Index, Russell Microcap Growth Index, Russell Microcap Value Index, Russell Midcap Index, Russell Midcap Growth Index, Russell Midcap Value Index, Russell Top 200 Growth Index, S&P 1000 Index, S&P 1000 Growth Index, S&P 500 Index, S&P 500 Growth Index, S&P 500 Value Index, S&P Composite 1500 Index, S&P MidCap 400 Index, S&P MidCap 400 Growth Index, S&P MidCap 400 Value Index, S&P SmallCap 600 Index, S&P SmallCap 600 Growth Index, and S&P SmallCap 600 Value Index.

All investing is subject to risk.

The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Diversification does not ensure a profit or protect against a loss in a declining market.