Another Use for Active Share—Understanding Portfolio Exposures

Abstract

We show how active share can be decomposed into segment and stock-specific exposures to create an active share risk profile. The method is demonstrated for global equity portfolios by attributing active share into contributions from country, sector, stock-specific, and non-equity positions within portfolios. Active share risk profiles can be used to identify the underlying sources of benchmark-relative risk within a portfolio both for a point in time and over time, and to compare the exposures in a portfolio relative to competitors. The method is straightforward to implement and may form a useful part of the toolkit for understanding benchmark-relative risk exposures within actively managed portfolios.

TOPICS: Equity portfolio management, global markets

Key Findings

• • Active share can be decomposed into an active share risk profile to help understand the underlying segment and stock-specific risk exposures within a portfolio.

• • Active share risk profiles are generated for global equity portfolios based around contributions from country, sector, stock-specific, and non-index exposures. Sources of benchmark-relative risk are isolated at a point in time and over time and comparisons made between portfolios.

• • Active share risk profile is straightforward to implement and can form part of the toolkit for understanding how active portfolios invest and what risk exposures they hold.