Sajjan has uncovered data showing average turnover among unit trusts and OEICs hit 90 per cent for the year to the end of February 2009, up from 50 per cent in February last year and 30 per cent in February 2007, and he believes this figure will rise to more than 100 per cent in the next few months.
Average annual portfolio turnover shows how many stocks in a portfolio are bought and sold in a given year. The challenge facing investors is that when this turnover rises it has cost implications, even though trading costs per se may not be reflected in standard definitions of TER (Total Expense Ratio).
Sajjan explains: "Every time a fund manager buys or sells a stock there is an implication in terms of expenses, so when it comes to a stage where almost every stock within a portfolio at the start of a year has been sold by the end of it, the costs really begin to mount up."
Many costs are not immediately obvious, but their impact is significant, Sajjan says: "Higher turnover obviously results in higher costs, but not all costs are that easily quantifiable, there are hidden costs to transactions which are not reported to investors and these could easily add up to a tenth of a funds’ return."
The impact of rising TERs on fund returns puts another strain on investors, who are already struggling to find returns across the board, and the impact of higher turnover on the risk profile attached to a fund is also significant.
Sajjan says: "Managers are playing more and more short term bets in a bid to take advantage of volatility, which increases the risk they’re taking. Our research shows a clear relationship between risk and return has emerged in recent markets, and unfortunately that relationship is inverse – the more risk one takes the more likely you are to fail."
He adds: "At best, it’s a case of running faster just to stand still, but fund managers are in a difficult position because the alternative – doing nothing and holding on to falling stock – really isn’t an option in a market where one really has to stamp out any losses that begin to occur in a portfolio."
The table below highlights the increase in portfolio turnover ratios over the past three years
| IMA Sector/Region |
PTR: 28/02/2006 to 28/02/2007 (%) |
PTR: 28/02/2007 - 28/02/2008 (%) |
PTR: 28/02/2008 - 28/02/2009 (%) |
| All | 30 | 50 | 90 |
| UK | 35 | 50 | 95 |
| Overseas | 25 | 45 | 85 |
| Europe | 30 | 60 | 100 |
Source: Financial Express data