Which Investors Matter?  673
Traders don’t need to develop a point of view on a company’s intrinsic 
value, just on whether its shares will go up or down in the very short term. 
For example, traders may develop a view that a drug company is about to 
announce good news about a product trial that will boost the company’s share 
price. The trader would buy the shares, wait for the announcement and the 
subsequent rise in the share price, and then immediately unwind the position. 
Some traders are in and out of the same stock many times during the year. 
This does not mean that traders don’t understand the companies or industries 
they invest in; on the contrary, they follow the news about these companies 
closely and often approach companies directly, seeking nuances or insights 
that could matter greatly in the short term. However, they don’t take a view 
on companies’ long-term strategies and business performance.
Mechanical investors control about 25 to 30 percent of institutional equity in 
the United States. They make decisions based on strict criteria or rules. Index 
funds are the prototypical mechanical investor, merely building their portfo-
lios by matching the composition of an index such as the S&P 500. Another 
group of mechanical investors are the so-called quantitative investors, who 
use mathematical models to build their portfolios and make no qualitative 
judgments on a company’s intrinsic value.
Finally, closet indexers, although they are promoted as active managers, 
have portfolios that look like an index. Basing their portfolio on an index and 
making some adjustments, they hold a great many stocks and don’t have the 
time and resources to do in-depth research on them.4 By contrast, intrinsic 
investors know every company in their portfolios in depth and build their 
portfolios from scratch, without taking their cue from any index.
The extent to which an investment fund might be considered a closet in-
dexer is now measured, and often published, using a metric called active share. 
Active share is a measure of how much an investment portfolio differs from 
its benchmark index, based on a scale of 0 percent (complete overlap with 
the index) to 100 percent (no overlap). An index fund would have an active 
share of 0 percent. Funds with active shares below 60 percent are often con-
sidered closet indexers. For example, while the William Blair Growth Fund, 
mentioned earlier as an intrinsic investor, typically has an active share above 
70 percent, Putnam Investors Fund typically has an active share of about 
40 percent. Antti Petajisto, a researcher and fund manager who taught at the 
Yale School of Management, has estimated that the percentage of funds that 
might be considered closet indexers increased from 1 percent in 1980 to almost 
30 percent in 2009.5
4 For more on closet index funds, see M. Cremers and A. Petajisto, “How Active Is Your Fund Manager? 
A New Measure That Predicts Performance” (paper presented at American Finance Association 2007 
Chicago Meetings, January 15, 2007); and E. Khusainova and J. Mier, Taking a Closer Look at Active Share, 
Lazard Asset Management, September 2017, www.lazardassetmanagement.com.
5 A. Petajisto, “Active Share and Mutual Fund Performance,” December 2010, available at SSRN: 
http://ssrn.com/abstract=1685942 or http://dx.doi.org/10.2139/ssrn.1685942.