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Turnover troubles: Is trading frequency disclosure a triumph for transparency?

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Baillie Gifford’s decision to start publishing its portfolio turnover figures has raised questions over how important such measures are and whether other active managers should follow suit.

Turnover figures show the percentage of the portfolio the fund manager replaces every year. When the figure is low it means the manager has traded less which, in turn, brings the fund’s costs down.

Since the FCA has found most active funds are not value for money compared with passives, can a disclosed turnover figure help identify long-term and cheaper funds?  If so, why are so few fund firms disclosing the figure in their fund factsheets? Or should turnover always be placed in a marketwide context alongside other measures?

Sorting the wheat from the chaff

Baillie Gifford director of retail marketing and distribution James Budden says: “The FCA has highlighted the naïve view that active managers don’t outperform and that debate has flowed into many levels. One of these is that not all active managers are the same while passive investors are. The argument really should be about whether you can sort out the good active managers from the not so good ones.”

While Chelsea Financial Services managing director Darius McDermott says publishing portfolio turnover plays a key part in the debate about transparency, he says the figure is “a function of the manager’s style” so it should not be considered in isolation.

He says: “What we think is more important is whether the manager is good and what the style is, but we are not against turnover. What low turnover indicates is managers are trading less and hence the overall cost of the fund is less. But if I turn my portfolio over 100 per cent and you do 50 per cent and we both have a 10 per cent performance after fees, then we’ve both done the same.”

When share prices are volatile, clients expect us to rotate the portfolio into shares where prices have fallen significantly 

Hedge fund or multi-asset managers tend to trade more than others as they take short-term macro views, resulting in higher turnover rates.

But despite different styles, experts suggest fund managers should describe the reasons why their turnover might be very high or low in that particular year.

McDermott says: “A mention of this in the fund manager note [in fund factsheets] might be a good idea.”

Getting ahead of the game

Though it is not a requirement, Orbis Investment Management has been disclosing annual portfolio net asset value turnover statistics for its Oeic funds online for a year.

Director Dan Brocklebank says the figure is “useful” but needs to be put into context as it can vary from year to year according to markets.

He says: “Our investment approach is long-term and we typically evaluate companies over a three- to five-year horizon so our turnover tends to be relatively low.

“Above all, however, we look to invest in companies where we see the biggest gap between price and intrinsic value. In years when share prices are highly volatile, clients should expect us to rotate the portfolio into shares where prices have fallen significantly.”

Investment consultant and The People’s Trust co-founder Daniel Godfrey agrees with Brocklebank.

He says: “Investors don’t need you to add value every year – just over the long-term time horizons that match their objectives.”

This year, for example, the annual turnover for Baillie Gifford ranged from 33 per cent in its American fund to 5 per cent in its Global Discovery fund as of the end of October.

McDermott says three- to five-year horizons should lead to a turnover of around 20 per cent, but notes some managers have one- to three- month horizon because they think they have a better probability of predicting stock prices over a shorter period.

Industry average turnover for the year between 2014 and 2015 was 46.8 per cent on the non-UK equity sectors, 33.7 per cent for UK equity sectors and 40.4 per cent on all equity sectors, according to the Investment Association.

McDermott says: “What Baillie Gifford is doing is giving evidence that they are long-term investors and that is good. What it doesn’t mean is it is the only way to invest. It is like active share rate, it doesn’t show if you are good or not, it just shows you are different from the index.”

Since February 2015, Baillie Gifford has been publishing the active share of its funds and their deviation from the benchmark.

FE research manager Charles Younes says turnover figures are “definitely” more meaningful than the active share number and says the FCA could make a case for making the turnover ratio publication compulsory.

There are issues with how turnover is calculated, however. Younes says: “One of the main challenges is turnover ratio means different things to different managers. There are two calculations possible: do you take into account trades following subscriptions or redemptions? Do you exclude this flow of money from that calculation?

“As there is no consensus on this calculation, I can understand why only a few asset managers have decided to release this number.”

AJ Bell head of fund selection Ryan Hughes argues turnover figures, tracking error, fees and active share are all “good and important measures” to paint a picture on how the fund manager is likely to perform but says no single measure is critically important to work out whether it is in line with the management style.

He says: “There is a perception that a low turnover figure is good but for me it is a one-dimensional measure.”

For example, he cites the OMGI Global Equity Absolute Return fund, which has a very high turnover because of its strategy but has been a fund very consistent with its returns.

Architas investment director Adrian Lowcock says while turnover figures would give investors an idea of whether a fund has high or low trading costs, individual investors may not find them much use.

He says: “Are the platforms likely to share the information with their clients and would investors know what they are looking at? Many individual investors are not experts and therefore might not benefit from having access to the information.

“The active management industry is looking to improve transparency but in doing so there can be unforeseen consequences so groups are taking it carefully.”

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  1. A recent report of the Complaints Commissioner suggests that the FCA should publish the portfolio turnover rates (PTR) of the funds which it regulates:

    http://fscc.gov.uk/wp-content/uploads/FCA00212-Final-Decision-21-11-16.pdf

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