Position adjusted turnover ratio and mutual fund performance

Abstract

Purpose

The purpose of this study is to examine the impact of position adjusted turnover ratio on mutual fund performance.

Design/methodology/approach

The author calculates position adjusted turnover ratio in the same three steps as Edelen et al. (2013). Position adjusted turnover ratio is intended to be a trading cost proxy that captures both fund trading volume and per-trade costs. A metric of eight Morningstar performance measures is utilized.

Findings

Results show that funds with a higher position adjusted turnover ratio tend to have a lower risk-adjusted performance, such as indicated by both Sharpe and Sortino ratios, and even though these funds may have a higher annualized return.

Research limitations/implications

The sample selection process is subject to a survival bias. Also, this study utilizes Morningstar performance measures rather than the widely used factors models.

Practical implications

This study examines the impact of invisible costs from fund trading. These findings encourage fund managers to take strategic steps to reduce the overall invisible cost impact to improve fund performance.

Originality/value

Few studies have investigated fund trading cost measured by position adjusted turnover ratio and its impact on fund performance. Further, this study contributes to current literature by using eight Morningstar fund performance variables, which are practitioner-oriented and are accessible by investors.

Citation

Fan, Y. (2018), "Position adjusted turnover ratio and mutual fund performance", Studies in Economics and Finance, Vol. 35 No. 1, pp. 65-80. https://doi.org/10.1108/SEF-03-2016-0075