Actuaries MJW have released a new report on active share.

Principal Ben Trollip said clients would not be averse to paying managers more fees if they could achieve a better result than the index.

"But what does it mean to be active? If I were to hold 48 of the 50 stocks in the S&P/NZX50 index and just slightly overweight Xero and underweight Trade Me, would you be happy paying me a large fee? With over 90% of my portfolio simply replicating the index, perhaps you'd argue I'm due at most a tenth of a full active management fee. After all, most of my portfolio would generate the index return, making it unlikely that the overall result would differ too much from the benchmark."

He said the measurement of active share was one way to determine how much an active manager was exercising their convictions.

Active share is calculated by adding the difference in allocation for each stock, between the portfolio and the benchmark index.

An active share of 0% would be a portfolio that was completely the same as the index and 100% would be completely different.

MJW research showed that of six active equity managers in New Zealand, none had more than 53% active share. Two only had 27%.

Trollip said that was a surprise “I knew the numbers were going to be low but that was a lot lower than expected. And they all call themselves active managers. Seeing below 30% was very surprising.”

He said that could be a concern to investors: “It is crucial that investors are getting what they pay for when employing an active fund manager. If your portfolio is only 30% different from the index, should you really be paying the same fee as a portfolio that is 60%, 70% or 80% active?”

He said fees “still had room to come down a bit more. If you look at the value-add they are generating and the fee they are charging. What is a fair proportion of value-add that the manager should be taking?”

New Zealand managers had a harder task to differentiate from the index than they would in a less concentrated market.

The maximum possible active share in New Zealand was only 64%, he said, assuming fairly tight stock limits (±2% versus index).