Ian Tam: For a few years now, news coverage on information technology stocks have dominated news headlines and for good reason. Technology stocks, although they trade at very high valuations, have shown extraordinary growth. Although our pickings are slim for technology companies in Canada, our markets have also been affected by this. Case in point Canada Shopify is now competing to be Canada's largest stock by market cap, right up against the Royal Bank of Canada.
This first chart shows the average and median exposure to information technology stocks in the Canadian equity mutual funds and ETF category, as well as the Morningstar Equity Benchmark Index over the last three years. In 2020, exposure to IT stocks shot up significantly both in the index and amongst fund managers.
Are managers simply following the index, to answer this question, I look at a measure called active share and simply put, active share essentially tells you how alike a fund’s portfolio looks to an underlying benchmark index. An active share close to 100 shows virtually no overlap with the index. Whereas an active share closer to 0 looks almost identical to the index. So this measure is useful when looking out for closet indexers or managers that claim to be active but are simply following the index. In that case, an investor might be better off investing passively to save on fees.
This scatter plot shows the active share of 130 Canadian equity funds plotted against each fund's exposure to information technology stocks. The farther to the right a fund is, the less it looks like the benchmark. The farther up a fund is the more exposure it has to technology. I have called out a few specific funds who have taken a larger than usual position in technology for your reference.
Now, remember that like many financial measures on a standalone basis active share not necessarily an indication of good future performance. However, it does show you how alike a portfolio looks to the index. For more information, click the link in the transcript to this video.
For Morningstar, I'm Ian Tam.
