According to data from FE Analytics, funds that have had a high turnover in the Active, Balanced and Cautious Managed sectors have returned on average 0.81 per cent less than those that have remained relatively consistent.
Performance and volatility of funds with high and low turnovers
| Active Managed |
1-yr returns (%) |
Annual volatility |
| Least extensive changes in top ten |
0.29 |
9.78 |
| Most extensive changes in top ten |
-0.64 |
10.14 |
| Difference |
0.93 |
0.36 |
| Balanced Managed |
||
| Least extensive changes in top ten | -1.25 |
8.6 |
| Most extensive changes in top ten |
-1.5 |
9.37 |
| Difference | 0.25 |
0.77 |
| Cautious Managed |
||
| Least extensive changes in top ten | 1.33 |
4.58 |
| Most extensive changes in top ten |
0.07 |
5.84 |
| Difference |
1.26 |
1.26 |
Source: FE Analytics
The biggest disparity was in the Cautious Managed sector. A portfolio of the top 10 per cent of funds with the fewest changes to their holdings beat an equivalent portfolio of funds with a high turnover by 1.26 per cent.
In the Active Managed sector the difference was 0.93 per cent, while in the Balanced Managed sector the figure stood at 0.25 per cent.
The findings follow a recent FE Trustnet study that found funds with a high turnover in the major UK equity sectors underperformed by an average of 2.3 per cent.
Graham Toone, head of research at AFH Wealth Management, says that the research confirms what he has always thought to be the case.
"I’m pleased that it has been proved that high turnover has a negative impact on performance," he said. "We manage an in-house OEIC with a very low turnover and that low activity seems to serve us well."
"Investors can get caught up in the hype and excitement of short-term news and data flow but we think it is important to have a much more long-term view."
The study also revealed that funds with a low turnover had on average 0.8 per cent lower annual volatility than their underperforming high-turnover peers.
The portfolio of low-turnover Cautious Managed funds was 1.26 per cent less volatile than the portfolio of funds that had experienced the most extensive changes to their top-10 holdings.
Patrick Connolly, head of communications at AWD Chase de Vere, says there are a couple of important lessons investors can learn from the findings.
"Firstly, fund managers (or anybody for that matter) do not consistently make the right stock calls," he said. "You hope that they are going to get them right more often than not but managers who identify long-term value and wait for that value to assert itself will be more successful in the long-run."
"Secondly, the more changes managers make to top-10 holdings, the higher the charges from brokers are going to be and this will impact the overall performance of the fund."