Active Share Catches a Regulator's Eye
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Wednesday, April 11, 2018

Active Share Catches a Regulator's Eye

Yet another nuance of the active-passive investing divide is gaining more ink. The concept of "active share" has now caught a key regulator's attention, and some big fund firms will now be using the metric for their equity funds.

Last week the staff of the State of New York's Investor Protection Bureau, under Attorney General Eric Schneiderman, released a 15-page report, "Mutual Fund Fees and Active Share." NYOAG (the Office of the New York Attorney General) surveyed 14 big mutual fund shops to gather data for the report, and now all 14 of them will be publishing the active share metric for their active equity funds available to U.S. investors.

The report has been covered by a host of publications, including: AdvisorHub, Bloomberg, CityWire, Financial Planning, Institutional Investor, Napa Net, Reuters, and ThinkAdvisor.

The 14 asset managers involved in NYOAG's research include: Axa's AB, Capital Group's American Funds, BlackRock, Ameriprise's Columbia Threadaneedle, BNY Mellon's Dreyfus, Eaton Vance, Fidelity, Goldman Sachs, J.P. Morgan, TIAA's Nuveen, MassMutual's OppenheimerFunds, T. Rowe Price, USAA, and Vanguard. Fidelity already published active share data for its actively managed equity funds, and J.P. Morgan did so for some (but not all) of its relevant funds. All 14 firms will now publish the metric for all of their active equity funds. And NYOAG "urges all mutual fund firms to follow suit for their similarly-situated mutual funds."

The NYOAG report fans the flames of the pre-existing debate within the fund industry, about whether investors should be paying for active management if that active management turns out to be so-called "closet-indexing." Indeed, the authors of the NYOAG report argue that "investors cannot necessarily assume that a high fee means that a fund will have a higher level of active management" and that "Active Share varies widely for actively managed equity funds with a high fee or expense ratio."

Yet while the report's authors call on other fund firms to follow suit, the report does not specifically call for any regulatory or rulemaking action around the active share metric.

It's also worth noting that, though the 14 firms involved in the NYOAG's research vary widely in size, they are all big firms with tens of billions of dollars in mutual fund AUM, and many have hundreds of billions or even trillions. Agreeing to disclose a new metric, like most new regulatory compliance or other costs, can be more easily born by a large fund firm with lots of assets to spread the cost out over. If the NYOAG or other regulators or lawmakers build off of this report to create new rules or laws around active share, smaller fund firms may feel the pinch more than their bigger brethren.

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