TURNOVER

turnover

 

 

The turnover rate in a fund is not necessarily a bad thing, but as mentioned, it does increase your tax bill if the fund is selling stocks with lots of short=term gains.

Additionally, as mentioned in the previous section on cost, turnovers cost you money.

If turnover does hurt a fund’s return, wouldn’t there be a correlation between a fund’s turnover rate and its after-tax return?  Indeed there is!

According to a recent study by Stefan Sharkansky, the lower a fund’s turnover, the higher its returns, in general.

“We analyzed the ten-year cumulative performance records of open-ended mutual funds in existence from December 1991 through December 2001.

Our findings are consistent with previous studies.  On average… lower turnover funds outperformed higher turnover funds by a substantial margin in every category of funds that we studied.”¹

The study also found that for the 10 years ending 12/31/01, each 100% turnover was expected to reduce the performance of a large-cap fund by 1.24% and 2.55% for small-cap funds.²

The conclusion of the study:

“Although our study admittedly covers a limited time period, it makes a strong case that for many domestic=stock categories, less active managers are more successful.

Investors are particularly unlikely to benefit from high=turnover strategies among large-cap value and blended funds and the rewards of turnover are also fairly small for most other categories.”

Please note that this study only analyzed the effect that turnover has on performance.  High turnover also increases the investor’s tax impact.

If you would like to know if your funds have high turnover and resulting high tax impact, please call and we can provide a free analysis on the funds you own.

_________________________________________________________

¹Stefan Sharkansky, Mutual Funds Costs:  Risk Without Reward, 5/02
²Ibid.