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Active Management Matters

The rise of passive investing, in recent years, has been fueled by many factors. Most significant is the low volatility bull market that began in 2009, which has resulted in active stock selection becoming less of a driver of positive results. Another factor is an increased focus on fees as a key component of net returns. Some in the active-management community also have contributed to the popularity of passive investing. After growth of their assets under management, many managers begin to place more emphasis on benchmark relative risk, and in some cases business risk, often delivering poor returns to investors.

We believe there are benefits to owning both active and passive strategies in your investment portfolio, but it is important to fully understand how your active managers invest.

Active Share
Active share measures the difference between a fund's holdings and its benchmark's holdings. The greater the difference, the greater the active share. Over the last decade, there has been much academic research on the topic. One of the earliest studies, published in 2009, is titled “How Active Is Your Fund Manager? A New Measure That Predicts Performance.” In it, authors Martijn Cremers and Antti Petajisto concluded that there is a positive correlation between a fund's active-share value and the fund's outperformance versus the benchmark. The analysis also revealed a prevalence of “closet indexers”—portfolio managers whose funds closely mirror the holdings of their benchmarks, while they continue to charge typical active-management fees. The analysis further showed that the funds with the highest active shares delivered the best long-term performance, before and after fees.

Of course, there are many additional factors that can contribute to outperformance, but we believe that investors should consider active share when evaluating active portfolio managers.

Consistently Active
At Weitz, our investment process has always been high conviction in nature and benchmark agnostic. A byproduct of our process is that our portfolios generally have high active share. In today's investment environment, where investors often prefer some allocation to passive portfolios, we believe our active investment approach represents a compelling complement to passive strategies. For more on our approach to High-Conviction Investing, click here.

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