In 2006 two Yale academics (Cremers, M. and Petajisto) introduced the term Active Share as a measure of active portfolio management.  The term measures the degree of overlap in holdings at the stock level between the fund manager and their benchmark index.  An Active Share of 100% implies zero overlap with the benchmark while a pure index fund will have an Active Share of 0%.

Unfortunately, as shown in the chart below, Active Share has been declining over time which means that many funds are increasingly mirroring their index.  This is due to the increased use of passive investment techniques but also because of the widespread use of benchmarks by active managers.  The rise of these “Closet Indexers” is an issue for IROs when considering which investors to target.  This is especially important as many so-called “Active” fund managers may actually be “Closet Indexers” who will typically only overweight or underweight their positions very slightly.

Spending valuable management time with a “Closet Indexer” will have little impact on marginal additional purchases of stock.  Therefore, it is clearly very important for IROs to be able to identify the stock pickers with concentrated portfolios in order to achieve the most from their meetings.