PERSPECTIVES March 2016 Active Investing Active Share Cross the Pond Gabe Altbach Head of Global Strategy and Marketing Claudia Bertino Head of Financial Communication Global Strategy & Marketing This article is part 3 of a 5-part series designed to give the reader some insights into Active Share and active management. Active Share is a relatively new measure of portfolio differentiation from the benchmark index, and investors have embraced it both as a measure of active management and as consideration for potential future outperformance. After gaining widespread adoption in the US, the potential application of Active Share is now garnering considerable interest in the European asset management industry. In this article we aim to provide an overview of the current regulatory framework for Active Share disclosure in Europe. Our findings show that regulators have been increasingly focused on Active Share in recent years. We also intend to contribute to the existing debate and knowledge on Active Share by conducting an empirical analysis of the US and European fund industries. We have found that Active Share's statistical relationship with excess return has been affected by the market cycle in both two markets. The differences in the statistics for the two markets might be due to a "market diversity effect" or an inherent bias rather than a truly different style of fund management. Giovanni Liccardo Financial Communication Specialist Global Strategy & Marketing This paper is for information purposes only and is not intended to, and does not constitute an offer or solicitation to investment. Indices are unmanaged, and their returns assume reinvestment of all dividends, and unlike fund returns do not reflect any fees and expenses. You cannot invest directly in an index. Investing involves significant risks, including the loss of principal value. Past performance is not a guarantee of future results. Before investing, please always consider the product s investment objectives, risks, charges and expenses. 1
After experiencing widespread adoption in the US, Active Share is now garnering considerable interest in Europe. In recent years, European regulators have increasingly focused on the degree to which funds charge fees for active management even though they are effectively behaving as passively managed funds. This interest has been reflected in several recommendations on the use of Active Share figures and investigations into closet indexers (Figure 1). In 2013, the Danish FSA issued an order requiring a Danish active fund manager to provide updates for Active Share on an annual basis. In 2014, the UK s Financial Services Consumer Panel urged the FCA to consider forcing fund companies to disclose their Active Share. In the summer of 2015, Swedish and Norwegian asset management associations recommended funds disclose an Active Share statistic in their Annual Report. Lastly, the German regulator has recently launched an investigation into its domestic asset management market to determine whether local companies charges high fees for active management, bit closely mimic their benchmarks. Figure 1: European Regulatory Framework into Active Share and Active Management 2013 2014 2015 End 2013 Danish FSA Oct 2014 Danish FSA Feb 2015 Swedish Government Nov 2014 UK Financial Services Consumer Panel Nov 2014 European Securities and Markets Authority Source: Pioneer Investments, October 30, 2015. For illustrative purpose only. Feb 2015 Dutch regulator, AFM Mar 2015 Norwegian regulator Mar 2015 Luxemburg regulator Summer 2015 Swedish/Norwegian asset management associations In the second article of the series (see ), we ve seen that Active Share is not a measure for all seasons when it comes to seeking outperformance, as it is subject to cyclical fluctuations. In this section, we want to investigate whether the cyclicality of Active Share depended on the geographical market by extending the analysis to Europe. To this end, we ve considered the Active Share statistics for 500 US Large Cap Equity funds benchmarked to the S&P500 and for all the Europe Large Cap Equity funds benchmarked to the Morningstar Europe. 1 The two samples are described in the boxes on the next page. Within this category, Active Share in the Europe Large Cap fund industry is higher (73.23%) than in the US (65.20%). However, we cannot say with certainty that on average Europe Large Cap funds were managed more actively than US Large Cap funds. We believe results were likely impacted by the benchmarks applied and fund 2
size, which are two biases of the Active Share measure we discussed in. Moreover, if the correlations 2 among stocks in Europe have been lower than in the US over the period examined, that would have impacted the average Active Share level. Box 1. US Funds Sample The sample was comprised of the largest 500 US Equity Large-Cap funds benchmarked to S&P500TR, representing almost $2 trillion of assets under management in total. We ve considered the largest Large Cap funds benchmarked to S&P500TR in order to avoid the benchmark, fund size and cap size biases seen in the first article of the series. 3 US Equity Large-Cap is formed by the following Morningstar Global Categories: US Equity Large-Cap Blend, US Equity Large-Cap Growth and US Equity Lage-Cap Value. US Equity Large-Cap portfolios invest primarily in large-size U.S. companies. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large-cap. For the sake of brevity, hereafter we can simply refer to the US Equity Large-Cap funds benchmarked to S&P500 TR as "US Large Cap" funds. Only surviving funds have been included in the sample. We define surviving fund as a fund that has not been closed or merged into another fund as of June 30, 2015. Unless otherwise specified all data are from Morningstar Universe as of June 30, 2015. Past performance is no guarantee of future results. Box 2. Europe Funds sample The sample was comprised of 279 Europe Equity Large-Cap funds benchmarked to Morningstar Europe, representing over $82 billion of assets under management in total. We ve considered the Large Cap funds benchmarked to Morningstar Europe in order to avoid the benchmark and the cap size biases seen in the first article of the series. Europe Equity Large-Cap is formed by the following Morningstar Global Categories: Europe Large-Cap Blend Equity, Europe Large-Cap Growth Equity and Europe Large-Cap Value Equity. Europe Equity Large-Cap is a Morningstar category composed of portfolios that invest primarily in large-size European companies. Equities in the top 70% of the capitalization of the European equity market (including the UK) are defined as large-cap. For the sake of brevity, hereafter we can simply refer to the Europe Equity Large-Cap funds benchmarked to Morningstar Europe as "Europe Large Cap" funds. Only surviving funds have been included in the sample. We define surviving fund as a fund that has not been closed or merged into another fund as of June 30, 2015. Unless otherwise specified all data are from Morningstar Universe as of June 30, 2015. Past performance is no guarantee of future results. 3
Apart from this descriptive statistic, from Table 1 we can see that the relation between Active Share and excess return was affected by the market cycle in both the US market and European market. 4 In addition, Active Share for US Large Cap funds seemed to be more closely related to excess return both positively and negatively than for Europe Large Cap funds in all the periods examined. Broadly speaking, the correlation analysis presented in Table 1 tells us that, over the periods considered, Active Share s information content did not change depending on the geographical market considered with respect to the "market cycle effect". Table 1: Correlation Between Active Share and Excess Return Performance Period US Europe Before Last Bull Market (Jun'99-Mar'09) 0.24 0.13 Bull Market (Mar'09-Jun'15) (0.22) (0.05) Overall period (Jun'99-Jun'15) 0.15 0.03 We identify the beginning of the last bull market on March 10, 2009, when the S&P500 index rebounded off from its multi-year lows. The bear market reversed course on March 9, 2009 when the S&P500 index hit bottom. Source: Pioneer Investments, elaboration on Morningstar data as of June 30, 2015. Data represents past performance, which is no guarantee of future results. In recent years, European regulators have increased their focus on Active Share to help uncover those funds that charge active fees even though they have been managed to do little more than track an index. We believe that Active Share can successfully be used to identify whether a selfdeclared active fund is instead adopting passive solutions. However, Active Share requires close attention when being used as a fund comparison tool. As discussed in, Active Share alone is not sufficient to determine whether one fund has been more actively managed than another, since other important factors come into play. In this article, we have seen that for the time period and benchmark used in our study, Europe Large Cap funds have had on average a higher Active Share than US Large Cap funds, but Active Share was more correlated with excess returns in the US than in Europe. However, these results may be simply due to a "market diversity" effect on the statistics rather than a truly different style of fund management. As always, we must remember that these Active Share statistics might be affected by one or more inherent biases seen in the first article of this series. 4
1 We are not presenting Active Share statistics on Europe Large Cap Equity funds benchmarked to the MSCI Europe Index because the relative Morningstar data are only available since 2009. 2 Correlation measures the degree of association between two or more variables; in finance, it is the degree to which assets or asset class prices have moved in relation to one another. Correlation is expressed by a correlation coefficient that ranges from -1 (never move together) through 0 (absolutely independent) to 1 (always move together). 3 Bias is a systematic error that can prejudice evaluation findings. In statistics, bias is defined as a systematic as opposed to a random distortion of a statistic as a result of sampling procedure. 4 Excess return is a measure of an investment s return in excess of a benchmark. Crèmers, K.J. Martijn and Antti Petajisto (2009), "How Active Is Your Fund Manager? A New Measure That Predicts Performance", Review of Financial Studies, 22, 3329-3365. Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of December 31, 2015. Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services. Indices are unmanaged, and their returns assume reinvestment of all dividends, and unlike fund returns do not reflect any fees and expenses. You cannot invest directly in an index. Investing can involve significant risks, including the loss of principal value. Investment returns will fluctuate. You should always consider your risk tolerance and investment objectives when considering investment options. Past performance is not a guarantee of future results. Pioneer Investments is a trade name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: March 1, 2016. Follow us on: www.pioneerinvestments.com 5