The topic of active share has been of increasing interest within the investment management industry over the past several years as the proliferation of ETFs and index funds places increasing pressure on active fund managers to defend their higher fees and, in many cases, still sub-par returns. Much of the academic research surrounding active share substantiates what we here at Polen Capital have known intuitively for many years: in order to outperform a benchmark and justify higher fees to clients, an active manager must be willing to deviate significantly from that benchmark. We believe that when this willingness to diverge from a benchmark is combined with the skill of strong stock selection and risk management, the result can be superior long-term returns for investors.
In this paper we will provide some background on the concept of active share, an analysis of why we believe it is a valuable metric for the average investor as well as a discussion of some of its limitations. We will also review active share in relation to Polen Capital and why we feel that our proven philosophy and process, which emphasizes principal protection, differentiates us from other active managers.