Harris Associates and Active Share
November 27, 2013
At Harris Associates, we are proud of our unwavering investment philosophy and process. A key tenet of our process is our active investment style. We strive to make investment decisions based on our own conviction and research findings, rather than mimic a benchmark. In 2009, Antti Petajisto and Martijn Cremers developed the concept of Active Share, which measures the percentage of an equity portfolio that differs from its benchmark¹. Their study found that:
Investment managers with high Active Share tend to outperform their benchmark indexes.
Active Share often predicts fund performance.
When selecting mutual funds, the authors recommend that investors should go with only the most active stock pickers.
The study found that only the most active stock pickers, defined as the Diversified Stock Picks and Concentrated Stock Picks groups, add value for their investors. These groups beat their benchmarks by 1.26% annually net of fees².
Closet Indexers are generally shown to underperform after fees given the small size of their active bets, yet they account for 1/3 of all mutual fund assets².
Petajisto wrote that Factor Bets (timers of factors such as sectors, market cap, style, asset allocation) have destroyed value after fees².
The Harris Associates Approach
Since 1991, Harris Associates has managed focused equity value funds that are benchmark indifferent.
Holdings: our funds are focused and generally hold fewer names than their corresponding benchmarks. Some of our funds have as few as 20 holdings and our largest funds may hold around 65 names. This is quite the opposite of “Closet Indexing” managers that hold 161 names on average and significantly less than U.S. equity mutual funds that hold an average of 104 stock positions.²
Weightings: our funds are constructed to enable each holding to meaningfully contribute to performance. The largest portfolio weights are given to those stocks that we believe have the greatest upside to intrinsic value.
Turnover: we invest for the long term. Our investment horizon allows us to steer clear of the day-to-day emotion of stock price movements and instead concentrate on enduring business fundamentals. We typically hold the names we own for 3 to 5 years.
Providing value for our investors is always at the forefront of our minds. We believe that our active management approach helps us reach our ultimate objective: to give investors the opportunity to achieve positive absolute returns over the long term.
¹K. J. Martijn Cremers and Antti Petajisto, “How Active Is Your Fund Manager? A New Measure That Predicts Performance,” published by Oxford University Press on behalf of The Society for Financial Studies, 2009, http://www.petajisto.net/research.html.
²Antti Petajisto, “Active Share and Mutual Fund Performance,” Financial Analysts Journal, January 2013, http://www.petajisto.net/research.html.
Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost.
The benchmark-beating results of high Active Share managers are an average of the group. Not all managers with high Active Share portfolios will beat their benchmarks.