mutual fund performance and turnover

[1/21/06] Here's a different study mentioned in Lowenstein's column in the February SmartMoney. Kevin Laughlin, assistant to Vanguard founder Jack Bogle, divided mutual funds into four groups: those with the highest turnover down to the lowest.

Sure enough, as turnover went up, performance went down. Among all domestic equity funds, over 10 years the funds that traded least had an annualized return of 11.49 percent; those that traded most had a return of 9.78 percent.

A possible factor may be that low turnover funds had lower expenses. Sure enough

Again, Laughlin has the numbers: The average expense ratio of high-turnover funds is 1.31 percent a year. At low-turnover funds expenses are only 1.0 percent.

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[8/1/05] A quote from Chris Davis

Our feeling is that if our research process is going to add value, it will do so by identifying companies with competitive advantages. Those advantages rarely manifest themselves in a year or two of the company's results. I don't know how someone could claim to have a research focus and also have 100% turnover. You only get to know a company well when you watch it closely over time. When you know a company well, you know when it gets mispriced and can take advantage of it.

[7/20/05] One would normally suspect that high turnover means low returns. Although funds pay very little in stock-trading commissions, those costs can add up when you rip out trades at a rapid pace. And rapid-fire trading often leads to rapid-fire mistakes.

But your suspicions would be wrong.

A note: One of the funds I own, White Oak Growth, has low turnover, but has been one of the worst performers since 2000. Their problem was holding high growth stocks all the way down even as the bubble popped. Turnover by itself doesn't seem to be an indicator of performance.