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Multi-manager View: Lowdown on high turnover

There is a widely held misconception in the fund of fund industry that high turnover is something to be avoided.

After all, the more you buy and sell funds, the higher your costs will be and perform-ance, as a result, will be negatively affected. We have sympathy with this view in so far as turning over one’s portfolio for no reason can have a negative impact on performance although the impact is obviously limited for fund of fund managers who do not incur initial fees when they switch.

To argue that having high turnover in your portfolios is always negative is, quite frankly, ridiculous. In fact, there are plenty of times when it would be a dereliction of duty for managers not to have high turnover.

Take 2003 as a case in point. At the start of that year, global stockmarkets were still in bearish mood, particularly in light of the looming war in Iraq. As the first weeks of the year went by, we became convinced that markets would reach an inflection point. We did not know exactly when it would happen, just that it was increasingly likely.

As the Jupiter Merlin portfolios are influenced by macro-economic events, reacting to this inflection point, when it happened, was crucial for us. We wanted to be prepared to ensure that we were ready to react at the right time to capture the start of a recovery in markets so we embarked on a fundamental review of our portfolios, which were – at the time – heavily defensive, and decided which funds we would want to buy when the market turned. We even wrote out our dealing tickets so when the moment arrived, we could act quickly.

That day came on March 12, 2003. We altered a significant proportion of our portfolios, switching from cash, bond and traditionally defensive sectors of the market into higher-beta equity funds that had greater exposure to cyclicality. This shift was intensified further during the Sars crisis a short while later when, after a decline in Asian markets, we increased our weighting in the region from 3 per cent to 16 per cent.

We did some analysis at the end of that year to assess the impact of our decisions. If we had stayed with the funds we had owned at the start of the year, we would have made a positive return of 24 per cent in the Jupiter Merlin growth portfolio but by shifting our portfolios in the way we did, we were able to capture an additional 8 per cent of performance – our actual return for that year was 32 per cent.

For us, that is a clear demonstration of how turnover can benefit investors. If we had not made the moves we did, they would have been worse off. Since 2003, our turnover has dropped off. Last year, we made a few changes in response to fund manager moves such as Neil Pegrum’s departure from Insight. This year, our turnover has also been low as equity markets have not been volatile and fund manager moves have been few and far between. In the year to the end of July, turnover on the Jupiter Merlin income portfolio has been 19 per cent and on Merlin growth it has been 35 per cent.

Turnover is a function of what the markets throw at us. If markets are fairly stable and there are few changes in the industry that require us to shift our holdings, turnover will be low. If we see a fundamental shift is taking place, we are not afraid to act. To use one of our favoured quotes from John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?”


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