Characterisation of South African Equity Unit Trusts Using The Active Share Measure as a Performance Indicator

Abstract

This study investigates the relationship between the active share, tracking error and investment performance of South African general equity and large cap unit trusts for the period 2003 to 2007. Active share reflects the amount of deviation of a unit trust’s equity holdings from a benchmark. The development of active share over time amongst unit trusts is investigated, as well as the relationship between active share, tracking error, fund size, number of equities in a unit trust and systematic risk as measured by beta. It was found that outperformance, as measured by Jensen’s α and the Omega ratio, was statistically significant for unit trusts in the highest active share quintiles. The relationship between tracking error quintiles and performance was less consistent. A slight increase with time in the active share value was observed — possibly as a result of a move away from resources and large cap shares, which are concentrated in the JSE indices. High active share was found to be associated with a larger number of active positions, a beta against the benchmark of less than one and low numbers of stocks. No relationship between active share and size was found.