Churn, churn and churn again

Do fund managers do what they say? Well, it seems not. At least when it comes to the frequency they change portfolio stocks.

Some equity fund managers have higher portfolio turnover rates than they claim, according to Investment Horizons, a report by Mercer, the consultants, and New-York based Investor Responsibility Research Center Institute.

Nearly two thirds of investment strategies had shorter investment horizons than fund managers intended between 2006 and 2009, with average stock churn more than a quarter higher than planned. Some of the strategies show turnover between 150-200 per cent higher than intended.

The mismatch between what fund managers expect and what happens should raise serious questions for investors, says Jon Lukomnik, IRRC programme director. “The impact can be significant in terms of cost, performance, and risk that the strategy is not being managed in line with its stated investment approach.”

Research from a variety of sources, including the UK’s Financial Services Authority, has shown trading costs to be a measurable drag on investment returns. High turnover also throws up the possibility of inexperienced fund managers, which should ring an alarm bell for investors.

European, including the UK, and US strategies have the highest average turnover levels.

The findings suggest the way strategies are being managed deviate from the way they are marketed to investors, at least in terms of investment horizons.

This should be a wake-up call for investors and consultants to keep a keen eye on turnover levels in future.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.