Zweig on Closet Indexing & Active Share

For many years, argues Jason Zweig in last month’s Wall Street Journal, “many fund managers haven’t done much managing at all.” Instead, he writes, they track market indices and “buy a bit more of this stock and a little less of that one, in what’s known as closet indexing.”

The problem, however, is that active fund management clients are paying hefty fees for what amounts to passive management. “To call such chicken-hearted tweaks ‘active management'” Zweig quips, “is an insult to the great swashbuckling stock pickers of the past.”

Unfortunately, he writes, “traditional disclosures shed little light on how active a fund truly is.” But investors can now obtain additional information on a website called (run by Martijn Cremers, a professor at the University of Notre Dame) that essentially scores a fund’s level of “active” management. A score of 60 is low; 80 and above means management is highly active.

Zweig emphasizes that such scores do not include a skill component and emphasizes that a high level of active management could correspond with low returns. But databases like those of can at least shine a light on closet indexers and, he argues, “force fund managers to be genuinely active or surrender the market to index funds.”

Active Share