Is High Turnover a Bad Thing? That Depends

Turnover is one of the more looked-at statistics for money managers. But what are the implications of turnover rate on a portfolio?

A new study funded by not-for-profit Investor Research Responsibility Center Institute (IRRC) digs into that topic, finding that many managers trade more frequently than they think — and often to their detriment. The study found that about two-thirds of investment strategies result in higher turnover than the manager expected, MarketWatch’s Chuck Jaffe reports, adding that the average was 26% higher.

“The point of the IRRC study is that turnover numbers highlight short-term thinking, even where managers say they are driven by long-term results,” Jaffe writes. Jon Lukomnik, program director for IRRC, said that “we know from a number of academic studies on frozen portfolios, that on average, additional trading costs money and doesn’t make enough to cover that extra cost. What you are seeing is a behavioral finance thing. There is overconfidence, where everyone thinks they are above average. Everyone is overconfident about their ability to trade out of trouble instead of trading into it.”

Jaffe says, however, that there is clearly “good turnover and bad turnover.”

In cases when an unexpected event, like a deep value stock getting bid up more quickly than anticipated, or a growth play unexpectedly posting bad earnings, a manager is wise to take action in accordance with his or her long-term strategy. “Sticking to the discipline, even if it forces turnover up, is a positive,” Jaffe says. “Turnover for the sake of trading isn’t, and Lukomnik said it’s this phenomenon that should make fund investors nervous if they see turnover numbers rising.”

Send a Comment

Your email address will not be published. Required fields are marked *