Active share

Active share is a measure used to assess how actively a fund manager deviates from the benchmark index. In the Nigerian context, for instance, if you are invested in the NGX and your portfolio's composition differs significantly from the index's, your active share will reflect this. If a manager actively selects stocks like MTN or Dangote Cement, which are not in the NGX, and holds them in different proportions, the active share quantifies this difference. A low active share, say below 50%, indicates that the portfolio closely tracks the index, akin to a closet indexer. Conversely, an active share above 80% means the manager is highly active, making numerous and significant deviations from the benchmark.

To put it in a relatable context, imagine you're running a small grocery store in Lagos. If you stock your shelves exactly like every other grocery store in the neighborhood, you're not taking any active share. But if you decide to stock more of certain brands or products that others aren't focusing on, you're being more active. This could potentially yield higher returns if your choices are spot on, but it also increases the risk of not matching the neighborhood's average sales. In investing, the concept is similar: the more active the fund manager, the greater the potential for outperformance or underperformance compared to the benchmark.

An example from the Nigerian financial landscape can be seen with the Central Bank of Nigeria (CBN). If the CBN raises the Monetary Policy Rate (MPR) to 27.50%, it affects interest rates across the board. A fund manager might decide to invest more in certain sectors like consumer goods or less in interest-rate-sensitive stocks such as banks. This decision impacts the active share. Similarly, when it comes to government securities like T-bills, a manager might choose to allocate differently based on current economic conditions.

Taxes and regulations also play a role in active share. For instance, dividends from Nigerian stocks are subject to a 10% withholding tax (WHT), and capital gains from selling investments are taxed at 10% (CGT). A fund manager may choose to hold onto certain stocks longer or sell others sooner to manage tax implications, thereby affecting the active share. This balancing act between maximizing returns and managing tax liabilities is part of what active management entails.

Why it matters: Understanding active share helps Nigerian retail investors gauge how much effort and risk their fund manager is taking. A higher active share means the manager is more aggressive in seeking to outperform the market, which could lead to higher returns but also comes with greater risk. Conversely, a lower active share suggests the manager is more conservative, closely tracking the benchmark. Knowing this can help you align your investment choices with your risk tolerance and investment goals.