“Buy and hold” is the favoured strategy of many successful investors, including Warren Buffett. But for many fund managers, it seems increasingly that investment horizons are measured not in years, but in months. Data provider Financial Express reports that the average UK fund’s annual turnover rate – the percentage of its portfolio that is changed each year – has risen from just over 40% of assets in 1990 to almost 150% today. That means that the average holding time for a stock has dived from two and a half years to just eight months, partly due to increased pressure on fund managers to deliver good returns every quarter, says Peter Thompson of Taylor Young Investment Management in the FT.
High turnover can be bad for a fund’s performance because each trade costs money – typically “anywhere from 0.2% to 5% of the assets traded”, says Matthew Richards, also in the FT. Low turnover is particularly important for small-cap funds: the spread between the buying and selling price of small company shares tends to be wider and they are also less liquid, so the very act of a significant player such as a fund selling or buying can move prices. And while low turnover is no guarantee of market-beating returns, it does require fund managers to have a great deal more conviction in their investment picks.
So which funds score well in the turnover stakes? Financial Express identified Invesco Perpetual’s World Income Fund as one of those with the lowest turnover – it has returned 60.5% over the past five years, compared to 38.3% for its benchmark. Unicorn’s Outstanding British Companies Fund, launched this month, is taking an even longer view with a ten to 15-year horizon for its stock picks.
Fund investment: get out of these funds now
Every fund manager – even the likes of Anthony Bolton – has off-days. But Chelsea Financial Services has identified 150 “relegation zone” funds that have consistently lagged their peers for the past three years. The ten biggest underperformers in terms of size – which have ranked in the bottom 25% of their sectors in each of the past three years – are listed in the chart above. “Three years of underperformance is unacceptable in nearly all circumstances,” CFS’s Darius McDermott tells The Mail on Sunday. He suggests that anyone still in these funds should switch to a more successful peer. Both Jupiter Emerging European Opportunities and Invesco Perpetual High Income have been in the top 25% of their sectors in the past three years.