Mutual fund turnover rate5/1/2023 ![]() Let’s say a mutual fund has a turnover rate of 33%, leading to an average holding period of three years. What percentage of the long-term (equity) funds in the marketplace is taking a less than long-term perspective while being marketed almost exclusively as long-term investing vehicles? No one (that I know) knows for sure but no one doubts the number is very high, either. market, turnover has risen from ‘about 25%’ in 1951 to above 100% in 1998.” He suggests the number has more than double since that time. John Bogle, in his recent book ‘Enough’ defines turnover as the number of shares traded as a percentage of shares outstanding and says that in the U.S. The absence of a readily accessible source to compare turnover rates makes it hard to quantify this problem.Īt any rate, there’s likely a massive disconnect between word and deed. ![]() The current tendency toward high-turnover funds makes it awfully difficult for advisors to filter competing products that are consistent with their stated philosophical perspective. This is something people with non-registered mutual fund accounts are all too aware of when they receive their tax slips at the beginning of every year even if they themselves did not trade the funds themselves. The less you trade, the longer you can hold the tax man at bay. Secondly, trading securities generally leads to higher tax liabilities when capital gains are triggered. In a mutual fund environment, that leads to higher MERs, which are a drag on performance, other things being equal. Many studies have demonstrated this as well. But what if advisors do their due diligence and find that they are limited by equity funds with high turnover rates? This is an important consideration because it seems most commentators believe there are quantifiable benefits to low turnover funds. Regulators might say there is a ‘know your product’ imperative that advisors need to meet. If you want to know what a specific fund’s turnover rate is you’ll have to check the most recent prospectus as these ratios are not available in any newspapers or Internet site that I am aware of. First of all, there is no single place where these ratios can be aggregated and compared. Do they? Getting a clear answer requires a bit of spadework. Whatever an acceptable “long-term” holding period is deemed to be, one would expect recommended mutual funds have a turnover rate that corresponds. In combining the use of mutual funds with a long-term philosophical approach, what might one expect the portfolio turnover of recommended funds to be? Can anyone who recommends (perhaps out of necessity) high turnover products genuinely be considered an advisor with a long-term perspective? ![]() While advisors have dozens of low turnover funds to suggest, they don’t necessarily have options in all fund families to make such recommendations. The question this begs is: How many fund companies assist their advisor ‘partners’ by manufacturing predominantly low turnover funds in order for advisors to remain intellectually honest in their recommendations? After all, advisors have to recommend funds from the universe of available products. to meet client redemption requests) in this calculation so that sometimes fund managers do more buying (if their fund is popular) or selling (if their fund is unpopular) than they would if managing a relatively static pool of capital. ![]() The calculation considers both purchases (i.e. Turnover rate is the reciprocal of the holding period (in years). If the manager trades 10% annually, the turnover rate moves to ten years. If a manager trades 14.2% annually, the turnover rate moves to seven years. If a fund manager trades 20% of the stocks in the fund in a given year, that fund would have a 20% annual turnover rate – making for an average holding period of five years. I’ll use a quick illustration of what a portfolio turnover rate is. I’d suggest there’s a consensus that anything between 5 and 10 years would likely qualify as long-term to most advisors. Rather, it is a subject where fair-minded people may differ. It’s probably safe to say that a vast majority of advisors (and this is especially true for those who recommend primarily mutual funds) tell their clients to use a ‘long-term perspective’ when investing.Ī single definition of what constitutes ‘long term’ does not exist. A practical example I would offer is in regard to portfolio turnover.
0 Comments
Leave a Reply.AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |