Possible correlations to institutional allocations versus market capitalization

Question

I seem to remember someone telling me a while back that a good indicator of future equity performance was how "institutionally under-owned" a given equity is versus its weight in a given broad market index (e.g., Russell 3000).

I cannot seem to remember the terms he used, but I do remember he cited academic research as supporting this premise.

I cannot find very much literature on this topic and/or data to support the claim.

Can anyone point me to a paper or resource on this potential market anomaly?

Answer 1

I actually found that what I was looking is referred to as "Active Share".

According to ActiveShare.info:

Active Share is the percentage of fund holdings that is different from the benchmark holdings...

Active Share is not a measure of skill but rather measures how different the fund's holdings are relative to the holdings of the particular benchmark considered...

Research has shown that as a group and over fairly long periods of time:

• funds with low Active Shares have tended to underperform their benchmarks net of costs
• funds with high Active Shares have tended to outperform their benchmarks net of costs, especially among funds that do not trade frequently, among small cap funds and among funds that do not have very large assets under management (see further the section 'Active Share Research')

...The papers below, co-authored by Martijn Cremers, provide further background and explanation. For more information on his academic research on Active Share, see activeshare.nd.edu.

The website also offers a search tool to determine a given fund's active share versus the S&P 500.