Technology stocks in the U.S. have dominated headlines for the last few years, with some kudos paid to Canada’s Shopify, and for good reason:
Now competing for the position of Canada’s largest company by market cap, Shopify (SHOP) has outpaced the index several times over. The company represents 6% of the S&P/TSX Composite Index, while simultaneously dwarfing the others within the technology sector in terms of its year-to-date performance:
Looking more broadly at the sector, on the surface the average Canadian-domiciled equity fund manager has increased their position in the technology sector by three-fold over the last three years, with a noticeable acceleration in 2020.
So are Canadian equity managers taking active bets in technology? Or is this a result of managers following their benchmark?
Enter Active Share
One way to measure managers’ propensity to ‘closet index’ is a concept called Active Share, which my colleagues have commented on here and here. In short, a fund with an Active Share of 100 would have no common holdings with its benchmark, while a fund with 0 active share would look identical to the index.
This is important because typically Canadians pay a higher fee for exposure to an active manager. If the manager is simply following an index, then perhaps it might be a better deal to buy a low-cost index fund – you would get a similar outcome.
Note: Like many financial measures, Active Share on a standalone basis is not a clear indicator of performance, however it is useful in painting a picture of how much a fund looks and behaves like a benchmark index.
To help understand whether Canadian managers are following the index, or taking active bets, I’ve created a scatterplot of 129 actively managed Canadian equity funds (which may include some strategic beta funds)
Active Vs Passive
The vertical axis shows the percentage of the fund’s holdings in the information technology sector while the horizontal axis shows the fund’s active share calculated against the Morningstar Canada GR Index.
The horizontal axis crosses at 10.8% which is the current weighting of information technology stocks in the benchmark. The chart shows that there are 15 funds with active share greater than 70. Of these, five funds have greater than 10% exposure to technology.
The broad majority of funds (96) have an active share between 30 and 70, of which 37 funds have more exposure to information technology stocks than the index. Unsurprisingly, funds with low active share have similar weightings in technology as the index.
| Name | Morningstar Star Rating | YTD Return (%) | 1-yr Return (%) | 3-yr Return (%) | 5-yr Return (%) |
| BMO SIA Focused Canadian Equity F | -8.07 | -4.87 | |||
| Caldwell Canadian Value Momentum | ★★★★★ | 1.12 | 2.55 | 5.63 | |
| Guardian Canadian Focused Equity W | ★★ | -10.94 | -10.61 | 1.81 | |
| United Canadian Equity Alpha Corp Cl E | ★★ | -14.72 | -11.34 | -3.81 | 0.49 |
| Yorkville Canadian QVR Enhanced Class F | ★★★ | -0.23 | 0.52 | 1.58 | 3.36 |
Source: Morningstar Direct Data as of September 14, 2020
The five funds that have been called out have higher than usual exposure to technology, but not all have shown outperformance against peers, with one exception. Caldwell Canadian Value Momentum has outperformed others in the category.
This is an example where active share alone doesn’t necessarily dictate performance in all cases. As a static measure, active share provides a snapshot of the current portfolio. However, the measure can provide valuable insight into how a manager is approaching the portfolio if observed over time.
This article does not constitute financial advice. It is always recommended to speak with an advisor or investment professional before investing.
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