Recent articles from InvestmentNews discuss the concept of active share and how it helps explain a superior performance of Fidelity® Contrafund® (FCNTX) vs. that of the S&P 500 index.

Active share is a measure of the degree by which the weights (percentages) of fund holdings differ from those of the index. In mathematical terms, it is simply half the sum of absolute values of weight differences. If the active share of a fund is close to zero, then the fund is effectively a replica of the index, hence the term “closet indexer.” Conversely, if the active share is 100%, the fund and index have no overlap. A large active share is a necessary but not a sufficient condition for a fund to add value over the index.

Active share of a fund is typically calculated based on its holdings reported in periodic filings. This leads to inaccuracies because such filings only contain point-in-time snapshots of the fund’s portfolio, are published with a delay, and are subject to a potential manipulation. There is also a problem of which benchmark is chosen to calculate the active share, as frequently the one chosen by the fund’s management does not precisely reflect the actual portfolio.

FCNTX is a case in point. While its stated benchmark is the S&P 500® index, in reality its best-fit benchmark is the Morningstar US Growth index. This is illustrated by the following reference weights chart for the fund:

Reference Weights for FCNTX

Currently, the fund’s equivalent positions with the highest weights are iShares Morningstar Large-Cap Growth ETF (JKE), PowerShares Dynamic Market Portfolio (PWC), and iShares Morningstar Mid-Cap Growth ETF (JKH), collectively accounting for 74%. Therefore, the use of S&P 500® index as the benchmark for the fund is misleading — it is clearly a “growth” fund with a significant mid-cap component. It is not then surprising that the active share of the fund measured against the S&P 500® index is a high 72%, as the stated in the second article.

When compared against the dynamic reference portfolio of exchange-traded products (ETPs) calculated by Alpholio™, the fund’s performance has been unimpressive:

Cumulative RealAlpha™ for FCNTX

Despite a substantial reduction of the underperforming position in Apple (AAPL), the fund’s cumulative RealAlpha™ in the past year remained largely flat. A high active share does not guarantee a superior performance of a fund on a truly risk-adjusted basis, as clearly demonstrated by this Alpholio™ analysis.

Disclaimer: Due to a multitude of random factors, perfect prediction of performance of an investment vehicle is nearly impossible. Therefore, the above analysis should be treated as merely one of the many inputs to an investment decision, and not as a definitive recommendation to buy or sell any securities. While Alpholio™ strives to provide original and useful insights into fund and portfolio performance, the ultimate investment decision belongs to you, the investor.

For a detailed explanation of the patent-pending Alpholio™ analysis methodology, please refer to the FAQ.

Pin It