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New York Takes Aim at Active Share Disclosures

Following an industry-wide investigation of mutual fund disclosures and fees, New York State’s Attorney General reached agreement with several large mutual fund firms to make information relating to their actively managed equity funds readily accessible and is calling on others to follow suit.

According to Attorney General Eric Schneiderman, this will help investors evaluate one or more actively managed fund investments and whether a fund’s portfolio selection process has created an opportunity for that mutual fund to outperform its index, as well as assessing whether a fund’s fees are acceptable.

The investigation by the AG’s Investor Protection Bureau involved reviewing fees and disclosures for more than 2,000 mutual funds to discern whether fees charged by actively managed equity funds correspond to the funds’ degree of active management, as reflected by their active share, which measures the degree of overlap between the holdings in a fund and the holdings in the fund’s benchmark index.

According to the resulting report, “Mutual Fund Fees and Active Share,” fees on an investment in an actively managed fund on average cost an investor nearly 4.5 times more per year than fees on an investment in a passive fund, yet these higher fees “do not necessarily reflect a higher level of active management.”

As a result, the report emphasizes that investors should not assume that a high fee, or expense ratio, for a mutual fund means that the fund will have a high active share. It notes that funds with average expense ratios of 0.55% to 1.75% were found to have a broad range of average active share, ranging from 60% to 100%, suggesting that there may be a limited relationship between fees and active share.

The report further contends, among other things, that many mutual fund firms gave unequal access to information about actively managed funds to institutional and professional investors, while excluding retail investors.

As part of this effort, Attorney General Schneiderman announced that 13 large mutual fund firms have agreed to voluntarily publish information about their mutual funds to all retail investors affecting 400 actively managed mutual funds. Under the agreement, the firms will disclose active share information showing the percentage of stock holdings in a fund’s portfolio that differs from that fund’s benchmark index.

“These new disclosures will give Main Street investors access to critical information before making investment decisions for themselves and their families,” Schneiderman said in a statement. “By working with us to help level the playing field for all investors, these firms are taking an important step forward. I encourage all mutual fund firms to follow suit.”

The report notes that Fidelity Management & Research Company was already publishing active share for its relevant funds. The additional 13 firms that agreed to publish active share information, with most agreeing to do so by spring 2018, include:

The Dreyfus Corporation
The Capital Group Companies
Columbia Management Investment Advisors
Eaton Vance
Goldman Sachs Asset Management
JP Morgan Chase & Co.
T. Rowe Price
USAA Asset Management Company