Active Share and Emerging Market Equity Funds

This paper represents the first specific attempt in the literature to examine the relationship between active share and emerging market equity fund performance. Using a sample of U.S. based diversified emerging market equity funds whose prospectus benchmark is the MSCI emerging market equity index, we find a positive and significant relationship between the average level of a fund’s active share and fund performance. Funds that are more active have significantly better performance than other funds. We find this result to be robust with three different performance metrics over the period 2009-2014. We also find evidence that highly active funds that keep their level of activeness consistent over time have significantly better performance than do funds that change their level of activeness. Finally, we document that a significant number of diversified emerging market funds were closet indexing over the period 2009-2014, but that the percentage of funds that pursue this strategy has been declining.