Practical analysis for investment professionals
18 February 2015

13F Watch: In Defense of Active Share

The poor performance of active management has been well chronicled of late, but the active fund management industry is not going down without a fight. Apologists have been quick to point to artificially low interest rates as one factor dragging down the collective returns of stock pickers. Index huggers — those managers with low tracking error funds and almost no hope of outperforming their benchmark after fees — are also to blame.

In response, active managers are pointing to their “active share” — a measure of how much a portfolio’s holdings differ from those of its benchmark — and research that suggests funds with the highest active share do indeed beat their benchmarks. However, a recent study by Nomura challenges this notion, finding that “active share has not been a reliable indicator of fund manager success.”

A review of just-filed quarterly 13F reports reveals that some of the most prominent fund managers truly embrace their role as active portfolio managers. At the end 2014, the top five long positions of the managers profiled below accounted for, on average, well over half of their portfolios’ value. Such concentration helps to set them apart from most of their peers.

  • William Ackman (Pershing Square Capital): Ackman added to positions in Zoetis (ZTS) and Platform Specialty Products (PAH), and trimmed an exiting position in Allergan (AGN), which has agreed to be acquired by Actavis (ACT). At the end of the quarter, Ackman’s top holdings were Allergan (AGN), Air Products & Chemicals (APD), Canadian Pacific Railway (CP), Zoetis (ZTS), and Restaurant Brands International (QSR), the newly formed parent company of Burger King Worldwide and Tim Hortons.
  • Bruce R. Berkowitz (Fairholme Funds): Berkowitz reported new stakes in Sears Canada (SRSC) and Canadian Natural Resources (CNQ). Notable sells from the portfolio included Lands’ End (LE), Chesapeake Energy (CHK), Lincoln National (LNC), BP (BP), and New York Community Bancorp (NYCB). At the end of the quarter, American International Group (AIG), Bank of America (BAC), Sears Holdings (SHLD), the St. Joe Company (JOE), and Leucadia National (LUK) remained Fairholme’s top holdings.
  • Warren Buffett (Berkshire Hathaway): Berkshire disclosed a new position in Twenty-First Century Fox (FOXA), and significantly increased its stake in Deere & Company (DE). Sold during the quarter were positions in Exxon Mobil (XOM), ConocoPhillips (COP), and Express Scripts (ESRX). Top holdings at the end of the quarter remained Wells Fargo (WFC), Coca-Cola (KO), American Express (AXP), International Business Machines (IBM), and Wal-Mart Stores (WMT).
  • David Einhorn (Greenlight Capital): Notable new positions in Einhorn’s portfolio included Time Warner (TWX), Keysight Technologies (KEYS), Chicago Bridge & Iron (CBI), Halyard Health (HYH), and Life Time Fitness (LTM). Sold during the quarter were stakes in CIGNA (CI), National-Oilwell Varco (NOV), Einstein Noah Restaurant Group (BAGL), American Capital Agency (AGNC), and Anadarko Petroleum (APC). Top holdings at the end of the quarter included Micron Technology (MU), Apple (AAPL), SunEdison (SUNE), CONSOL Energy (CNX), and Marvell Technology Group (MRVL).
  • Jeremy Grantham (GMO): GMO’s largest new positions included Auxilium Pharmaceuticals (AUXL), Baker Hughes (BHI), Alibaba Group (BABA), Talisman Energy (TLM), and Ubiquiti Networks (UBNT). Notable sells from the portfolio included positions in Shire (SHPG), Tim Hortons, McKesson (MCK), Banco Santander Brasil (BSBR), and Compuware (CPWR). At the end of the quarter, GMO’s top holdings included Express Scripts (ESRX), Philip Morris International (PM), Oracle (ORCL), Microsoft (MSFT), and Apple (AAPL).
  • Carl Icahn (Icahn Associates): Icahn established a new position in Manitowoc (MTW), and added to positions in Hertz Global (HTZ), Navistar (NAV), and eBAY (EBAY). At the end of the quarter, top holdings included Apple (AAPL), CVR Energy (CVI), eBAY (EBAY), Federal-Mogul (FDML), and Chesapeake Energy (CHK).
  • Seth Klarman (Baupost Group): Klarman added new positions in Forward Pharma (FWP), Paratek Pharmaceuticals (PRTK), Atara Biotherapeutics (ATRA), and Bellatrix Exploration (BXE), and sold his stakes in RF Micro Devices (RFMD), TriQuint Semiconductor (TQNT), Boyd Gaming (BYD), and AVEO Pharmaceuticals (AVEO). Top holdings at the end of the quarter included Cheniere Energy (LNG), ViaSat (VSAT), Micron Technology (MU), eBAY (EBAY), and Antero Resources (AR).
  • Daniel S. Loeb (Third Point): Loeb’s largest new positions established during the quarter included Phillips 66 (PSX), Citigroup (C), EMC (EMC), American International Group (AIG), and Delta Air Lines (DAL). Notable sells from the portfolio were Bed Bath & Beyond (BBBY), Coca-Cola Enterprises (CCE), Parker-Hannifin (PH), Avago Technologies (AVGO), and YPF (YPF). At the end of the quarter, top holdings included Amgen (AMGN), Alibaba Group (BABA), Dow Chemical (DOW), Actavis (ACT), and Ally Financial (ALLY).
  • Howard Marks, CFA (Oaktree Capital): Marks’s largest new positions included Store Capital (STOR), Tribune Media (TRCO), Eagle Bulk Shipping (EGLE), Banc of California (BANC), and Baidu (BIDU). Sold from the portfolio were Telefonica Brasil (VIV), Surgical Care Affiliates (SCAI), NetApp (NTAP), EMC (EMC), and McDermott International (MDR). Top holdings at the end of the quarter included Store Capital (STOR), Tribune Media (TRCO), Star Bulk Carriers (SBLK), Dynegy (DYN), and First BanCorp/Puerto Rico (FBP).
  • Nelson Peltz (Trian Partners): The only changes Peltz made to his portfolio were increases in his holdings in DuPont (DD) and Mondelez (MDLZ). Top holdings at the end of the quarter included DuPont (DD), PepsiCO (PEP), Mondelez (MDLZ), Bank of New York Mellon (BK), and Ingersoll-Rand (IR).
  • Barry Rosenstein (Jana Partners): Rosenstein established new positions in NCR (NCR), Liberty Ventures (LVNTA), SolarCity (SCTY), Computer Sciences (CSC), and Salix Pharmaceuticals (SLXP). Notable sells from the portfolio included Equinix (EQIX), Cameron International (CAM), Dollar General (DG), QEP Resources (QEP), and Amgen (AMGN). At the end of the quarter, top holdings included Walgreens Boots Alliance (WBA), Hertz Global (HTZ), PetSmart (PETM), eBAY (EBAY), and Ashland (ASH).
  • David Tepper (Appaloosa Management): Tepper established a new position in American Realty Capital Properties (ARCP), and notable sells from the portfolio included Citigroup (C), Halliburton (HAL), Facebook (FB), CBS (CBS), and Apple (AAPL). At the end of the quarter, top holdings included General Motors (GM), HCA Holdings (HCA), Priceline Group (PCLN), Whirlpool (WHR), and United Continental Holdings (UAL).

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockPhoto.com/erhui1979

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, is director of Member and Corporate Products at CFA Institute and serves as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

6 thoughts on “13F Watch: In Defense of Active Share”

  1. MarketFox says:

    Great post.

    Active share is one of several measures that can help to identify managers that have a better chance of beating the market.

    You can find out more on my blog: wwww.marketfox.org

    On its own, it doesn’t tell investors much. Just because a manager’s portfolio is “different” doesn’t necessarily mean that it’s a “good” portfolio.

    Investors need to look at several factors before making a judgement on the quality of a fund manager.

    That said, many of the best investors run concentrated portfolios (Buffett) but not all of them (Schloss).

    Several fund managers have written articles pointing out potential flaws in active share (e.g. Fidelity). Coincidentally, they also have big businesses selling benchmark-relative products. Funny that.

    1. Dave Larrabee says:

      MarketFox,

      Thanks for visiting our blog and for your comments.

      -Dave

  2. Brad Case, PhD, CFA, CAIA says:

    Very interesting, David. Nomura’s conclusion is consistent with the study published by Griffin & Xu (http://www.jgriffin.info/Research/smart.pdf), who concluded that “overall, our study raises serious questions about the perceived superior skill of hedge fund managers.” Griffin & Xu used 13F forms to identify long hedge fund stock positions, and compared them with mutual funds. “These findings indicate that hedge fund holdings and trading are not adding value on average. … In terms of stock picking, there is some weak evidence that hedge funds outperform mutual funds on a value-weighted basis, but these superior returns are largely concentrated in the high price-to-sales (technology) sector in 1999 and 2000. … Hedge funds exhibit no ability to rotate capital among different asset styles at opportune times and their average style selection slightly underperforms mutual funds. … Overall, we find that hedge funds seem to be no better at long-equity investment than mutual funds. Given that hedge funds generate higher turnover and trade in less liquid securities, our performance comparisons would look even worse if transaction costs were included. Back-of-the-envelope calculations using a standard hedge fund fee structure suggest that hedge funds are a worse vehicle than mutual funds over our sample period. … We predict that as data quality improves, more studies will begin to question the wisdom of hedge fund invesment.”
    I should disclose, by the way, that I have been a tiny investor in CP Rail and therefore have benefited from Ackman’s activism in that company.

    1. Dave Larrabee says:

      Brad,

      Thanks for sharing your insights and for the link to the Griffin & Xu paper.

      -Dave

  3. Pat says:

    Just because a company has dropped off the 13F filing doesn’t mean it’s been sold. Here’s an article explaining why Warren Buffet may not have sold his holdings in Exxon – and it’s better than the usual quality of Motley Fool articles: http://www.fool.com/investing/general/2015/02/23/did-warren-buffett-eject-exxonmobil-from-his-portf.aspx

  4. Dave Larrabee says:

    Pat,

    Thanks for visiting our blog and for enriching this discussion. It will be interesting to see if Buffett did indeed seek confidential treatment for his ExxonMobil position.

    -Dave

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