Low turnover a “sign of a manager with no ideas”, says Moore
The head of Standard Life UK Equity Income Unconstrained says the frequency with which he buys and sells stocks in his own portfolio ensures his holdings do not outlive their usefulness.
Low turnover in a fund can be a sign that the portfolio is stale and that the manager has few ideas, according to Standard Life's
Managers who buy and hold for the long-term, making few changes to their portfolio, are usually regarded as having a high conviction in each stock. However, Moore (pictured right)
, who runs the Standard Life UK Equity Income Unconstrained
fund, says investors should be wary of this perception, which can be a cover for a lack of imagination.
"I think one of the risks in a low-turnover portfolio is that it raises the question: how much is that fund manager thinking about each and every position every day and coming up with fresh ideas?" he commented.
Moore claims that managers of giant funds often have no choice but to have a low turnover.
"When funds get very big and their turnover is very low – which has come first?"
The manager admits his turnover is high, at around 70 per cent over the past three years, but says it shows he is constantly working to ensure the portfolio is not getting stale; he reviews his holdings weekly using Standard Life’s automated Matrix system.
The manager has grown his portfolio from £13m to £94.9m since he took over in January 2009, and in that time it has been the fourth-best performing UK Equity Income fund, with returns of 86.64 per cent.
Performance of fund vs sector since Jan 2009
Source: FE Analytics
Moore has been looking into the mid cap space to come up with more original ways to find income, and has 59.2 per cent in the FTSE 250.
He claims that some of the larger funds in the UK Equity Income sector are locked into unwanted positions in many small or mid cap companies that they invested in when the fund was smaller and now find hard to exit – pushing their turnover down.
"You can see that some of the larger funds have tails of small and medium cap holdings which they cannot get rid of," he said.
Andy Parsons, head of research at The Share Centre, says that whether a turnover rate is an issue or not depends on the aims and style of the manager in question.
"It is something that we look at and we do ask management about the portfolio turnover rate when we meet them," he commented.
"The answer they give is taken into account once we understand the investment approach and objectives of the manager."
"It’s certainly not the case that low turnover is always a bad sign – Warren Buffett is the world’s most successful investor and he is a buy-and-hold long-term investor with a low turnover. It can be a sign of conviction in themes and ideas."
Parsons says he looks for a disparity between a manager’s stated aims and strategies and his rate of buying and selling.
A change in turnover rate can also be a sign that something is wrong, he explains, as it can be an indication that a manager is no longer following his stated principles.
"If I see something that doesn’t fit with the declared strategy, it rings alarm bells and I want to know why," he said.
Although industry experts such as Parsons factor turnover rates into their assessments of funds, it is information that is not available to retail investors. Parsons says this may be for the best.
He commented: "It might create more questions for the average investor. I wouldn’t want to create more worries and more reticence to invest as they have enough already."
"I hear a lot of people talking about Alpha and Beta and I worry they don’t even understand this. We need people to become more educated in general about investments and then perhaps they might know what to do with information about turnover."
"In the long-run I think it is information that will be published on factsheets, but I’m not sure investors are able to understand what’s already published there."
Moore’s Standard Life UK Equity Income Unconstrained portfolio has a minimum investment of £1,000 and a total expense ratio (TER) of 1.91 per cent. It has a yield of 4.15 per cent.