Portfolio turnover activity and mutual fund performance

Claudia Champagne (Department of Finance, Sherbrooke University, Sherbrooke, Canada)
Aymen Karoui (Department of International Studies, York University, Toronto, Canada)
Saurin Patel (University of Western Ontario, London, Canada)

Managerial Finance

ISSN: 0307-4358

Publication date: 12 March 2018

Abstract

Purpose

The purpose of this paper is to propose a new measure of portfolio activity, the modified turnover (MT), which represents the portion of the portfolio that the manager changes from one quarter to the next. Compared with the traditional turnover, the MT measure has a distinct interpretation, relies on portfolio holdings, includes the effects of flows and ignores the effects of offsetting trades.

Design/methodology/approach

Using quarterly holdings data, the authors examine the relationship between fund turnover, performance, and flows for a sample of 2,856 actively managed mutual funds over the period 1991-2012. The authors provide numerical examples to illustrate how the suggested measure, MT, is different from the traditional turnover measure. The authors use panel regressions, simple and double sorts to examine the predictability of performance.

Findings

The authors find evidence that high MT predicts lower performance. The comparison between the highest and lowest quintiles sorted based on MT reveals a difference of −2.41 percent in the annual risk-adjusted return. Furthermore, high MT predicts lower net flows. The authors also find that MT relates positively to other activeness measures while volatility, flows, size, number of stocks, and the expense ratio are significant determinants of MT. Overall, the results suggest that frequent churning of a portfolio is value destroying for investors and signals a manager’s lack of skill.

Originality/value

The authors offer a simple measure, namely, MT, for estimating the fraction of a portfolio that changes from one quarter to the next. Armed with this tool, the authors investigate whether funds deviate from their previous quarter’s holdings because of valuable or noisy information, and whether such signals are exploited by fund investors.

Keywords

Citation

Claudia Champagne, Aymen Karoui and Saurin Patel (2018) "Portfolio turnover activity and mutual fund performance", Managerial Finance, Vol. 44 No. 3, pp. 326-356

Download as .RIS

DOI

: https://doi.org/10.1108/MF-01-2017-0003

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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