9
Morningstar FundInvestor
November
2013
How many other funds list gold bullion as a top hold-
ing? Plus, given the fund’s emphasis on minimizing
risk in absolute terms, it often holds prodigious
amounts of cash, which is nearly
22%
of assets.
Finally, as with the Longleaf funds, First Eagle Over-
seas’ profile matches that of its domestic sibling,
First Eagle U.S. Value
FEVAX
. Following a similar
approach, large-blend First Eagle U.S. Value recently
had an active share of
88%
(versus
73%
for the
group median) relative to the S
&
P
500
Index and a
five-year tracking error of
6
.
3%
versus the
4
.
5%
group median.
But high active share and high tracking error don’t
always go together.
Artisan International Value
ARTKX
is a case in point. It has one of the highest
active shares in the group at
94
.
3%
, but its five-year
tracking error is below average at
5
.
1%
. The fund’s
high active share owes to a fairly compact portfolio
with
50
or so stocks. But its moderate tracking error
is somewhat of a surprise given that cash tends
to build (it’s currently
11%
) when the team can’t find
bargains, and its sector weightings often deviate
from the benchmark.
Impact of Size?
The aforementioned intrafamily consistency runs in
the other direction, too. Among domestic large-blend
funds,
American Funds Fundamental Investors
ANCFX
and
American Funds
Investment Company
of America
AIVSX
both had below-average active
share relative to the S
&
P
500
, at
64
.
0%
and
67
.
0%
,
respectively. Likewise, foreign-equity siblings
Amer-
ican Funds International Growth and Income
IGAAX
and
American Funds EuroPacific Growth
AEPGX
both sported below-average active share
results, at
76
.
7%
and
68
.
1%
, respectively.
In fact, American Funds EuroPacific Growth’s active
share was the lowest in our sample. With nearly $
115
billion in assets, it’s hard not to notice that the fund
is also the largest competitor, with no other offering
even half its size. The contrast even shows with
smaller sibling American Funds International Growth
and Income. That fund is a fraction of EuroPacific’s
size with just more than $
7
billion in assets. However,
it also has a narrower mandate than EuroPacific, so
that might account for some of its higher score. But
EuroPacific’s gargantuan asset base must make it
harder for the fund to differentiate itself from a capi-
talization-weighted benchmark such as the
MSCI
All
Country World Index ex
USA
.
A Better Describer Than Predictor
American Funds EuroPacific Growth provides a poten-
tial counter-example to active-share fans. Despite
having below-average active share, as well as below-
average five-year tracking error (
4
.
5%
versus
5
.
5%
for the group median), the fund’s nearly
7
.
2%
annual-
ized five-year return through September beats that
of both the
MSCI
index (
6
.
3%
) and the foreign large-
blend average (
5
.
9%
).
This isn’t to argue that active share isn’t an important
measure, but more that investors shouldn’t draw hard
and fast conclusions based on this metric alone. It
certainly should be included in the mosaic an investor
builds when evaluating a fund, but there is more
work to be done to understand these metrics and how
best to use them. We plan to further explore the
utility of active share and tracking error in the months
and years to come, all with the goal of helping
investors learn more about what is driving a given
fund’s performance and why.
A Dimension That Active Share Misses
Although active share sounds like a measure of how
active a fund is, it doesn’t capture the trading side
at all. Two funds with the same portfolios would have
the same active share even if one had
5%
turnover
and the other had
300%
turnover.
Buy and sell strategies are crucial to a fund’s
success, and the rate of trading certainly tells you a
lot about how active a fund is on that front.
œ
Contact Kevin McDevitt at
