Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Portfolio turnover activity and mutual fund performance

Portfolio turnover activity and mutual fund performance PurposeThe 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/approachUsing 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.FindingsThe 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/valueThe 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Portfolio turnover activity and mutual fund performance

Managerial Finance , Volume 44 (3): 31 – Mar 12, 2018

Loading next page...
 
/lp/emerald-publishing/portfolio-turnover-activity-and-mutual-fund-performance-CveIqqPHE6
Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0307-4358
DOI
10.1108/MF-01-2017-0003
Publisher site
See Article on Publisher Site

Abstract

PurposeThe 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/approachUsing 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.FindingsThe 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/valueThe 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.

Journal

Managerial FinanceEmerald Publishing

Published: Mar 12, 2018

References