In this episode, we’re joined by Martijn Cremers, Dean of the Mendoza College of Business at the University of Notre Dame and co-author of the groundbreaking 2009 paper that introduced the concept of Active Share. Martijn brings fresh nuance to the long-standing debate over active versus passive management, challenging decades of conventional wisdom built on the foundational 1997 Carhart paper. With his comprehensive research, Martijn argues that dismissing active management may be overly simplistic—especially in less efficient markets like bonds, small-cap equities, or emerging markets. Together, we explore how empirical support for passive superiority has softened in recent decades, the overlooked structural flaws in performance benchmarks, and how closet indexing quietly undermines the active management space. Martijn outlines the three pillars of active success—skill, conviction, and opportunity—and makes a compelling case for patient, high active share strategies that persist over time.

Key Points From This Episode:

(0:01:24) Introduction to Martijn Cremers and his influential work on Active Share

(0:04:15) Breaking down the “conventional wisdom” on active management post-Carhart

(0:07:19) Why passive benchmarks like Fama-French factors may create misleading comparisons

(0:09:38) Reviewing persistence of outperformance in high active share funds

(0:12:40) Evaluating Sharpe’s arithmetic and how market evolution challenges zero-sum assumptions

(0:15:58) The long-term decline of active funds and the influence of concentrated indexes

(0:18:30) The paradox of skill, ETFs with high active share, and the survival of active managers

(0:21:18) Revisiting active management in underexplored asset classes: bonds, small caps, emerging markets

(0:23:20) The definition and calculation of Active Share

(0:25:01) Active Share vs. Tracking Error: complementary tools, not substitutes

(0:27:22) What level of active share signals closet indexing? Why 60–70% is the key threshold

(0:30:49) Performance persistence and why combining high Active Share with patience matters

(0:34:05) The concept of the “active fee” and how much you’re really paying for stock selection

(0:36:51) Why fund size and team changes can erode active share

(0:38:17) Three pillars of successful active management: skill, conviction, and opportunity

(0:40:13) The challenge of being a patient manager in an impatient world

(0:42:25) How Active Share was received by academics and practitioners

(0:44:18) Responding to critics: the 2016 FAJ paper “Deactivating Active Share”

(0:46:56) Why dispersion in high active share funds can enhance portfolio diversification

(0:49:21) Who should pursue high active share strategies—and who shouldn’t

(0:51:40) Active share in fixed income: Why passive bond funds are often far from passive

(0:53:51) Key structural differences between equity and bond indexing

(0:55:25) Why bond index funds have high active share and hidden tracking error

(0:57:36) Why positive skewness (a key argument for equity indexing) doesn’t apply to bonds

(0:59:22) Performance of active bond funds: modest but consistent outperformance

(1:00:02) Why active bond funds remain popular: liquidity, trading frictions, and benchmark limitations

Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/

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Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Dan Bortolotti — https://pwlcapital.com/our-team/

Dan Bortolotti on LinkedIn — https://ca.linkedin.com/in/dan-bortolotti-8a482310

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Episode 316: Andrew Chen - https://rationalreminder.ca/podcast/316

Episode 212: Ralph S.J. Koijen - https://rationalreminder.ca/podcast/212

Episode 220: Jonathan Berk & Jules Van Binsbergen - https://rationalreminder.ca/podcast/220

Episode 346: Hendrick Bessembinder - https://rationalreminder.ca/podcast/346

Papers From Today’s Episode:

https://zbib.org/2224f8de634743fb8f33a68009b8fcff

RI QUARANTINED EP16 - Willem Middelkoop, Founder & CIO: Commodity Discovery Fund