Funds in the UK All Companies, UK Smaller Companies and UK Equity Income sectors with a high turnover have returned on average 2.3 per cent less than those that have kept faith in their portfolio.
Returns and volatility of funds over 1-yr
| UK All Companies |
1-yr returns (%) |
Annual volatility (%) |
| Funds with lowest turnover in the last year |
-0.95 |
10.46 |
| Funds with highest turnover in the last year |
-3.47 |
14.42 |
| Difference |
2.52 | 3.96 |
| UK Smaller Companies |
||
| Funds with lowest turnover in the last year |
4.26 |
11.06 |
| Funds with highest turnover in the last year |
1.89 |
12.47 |
| Difference |
2.37 |
1.41 |
| UK Equity Income |
||
| Funds with lowest turnover in the last year |
0.36 |
12.43 |
| Funds with highest turnover in the last year |
-1.65 |
15.46 |
| Difference |
2.01 |
3.03 |
Source: FE Analytics
The difference between funds that saw their managers make a lot of changes and those in which managers stuck to their guns was most pronounced in the UK All Companies 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 2.52 per cent.
The disparity in performance in the UK Smaller Companies and UK Equity Income sectors was 2.37 per cent and 2.01 per cent respectively.
The study also revealed the funds that have made fewer changes have also benefitted from an average of 2.3 per cent lower volatility a year.
In the UK All Companies sector, the portfolio of low-turnover funds had an annual volatility score of 10.46, while the high-turnover funds had a score of 14.42. By comparison, the average UK All Companies fund has a score of 13.58 per cent.
Performance of portfolios over 1-yr
Source: FE Analytics
John McClure, manager of the Unicorn UK Income fund, has focused on keeping the turnover of his fund down over the past three years.
"Our view is to have a three-to-five-year horizon for any of the stocks we invest in so we don’t expect to change the holdings very much," he said. "The crisis we’re in is an extension of the banking crisis that erupted in 2008 so we haven’t seen any reason to change our focus on companies with overseas exposure."
While the fund has struggled so far in 2011, data from FE Analytics shows that Unicorn UK Income has outperformed any other Equity Income fund over the last three years, with returns of 95.61 per cent.
Tim Cockerill, head of collectives research at Rowan Dartington, says that the findings highlight the importance of choosing the right stocks and sticking with them.
"The research is potentially quite telling; in a year which has been difficult for equity investors, it looks very much like the winners are those who are prepared to stick by their longer-term analysis and not go chasing the latest trade," he said.
He added: "Dealing costs are a factor in all of this too and high turnover levels - whether in a fund or stock broker portfolio - are paid for by the investor and it damages returns."
"Furthermore, this research points out the fact that short-term trading isn’t easy; investors get buffeted by rapidly changing situations; whereas the long-term investor can look beyond the short-term market noise. Don’t fiddle with your investments is the message, it’s likely to do more damage than good."
Click here to read more from Tim Cockerill on holding periods and long-term investing.