Turnover matters

 

Two mantras of Vanguard's John Bogle are costs matter and turnover matters. We've looked at the former in Can you afford to invest in mutual funds?.

To get a better appreciation of how much turnover matters, Morningstar "Fund Spy" Peter Di Teresa looked at the relationship between turnover and the returns of US-based US equity funds. He found that the average equity fund had an annual turnover of an astounding 87%. That means the fund manager replaced 87% of the fund's assets with new stocks each and every year.

Then he looked at the 5-year compounded annual return of funds with turnovers at least twice the average, less than half the average and less than one-quarter of the average. Here are his results.

Turnover 5-year CAR
 > 174%  17.14%
 < 44%  18.75%
 < 22%  19.68%

Note the roughly 2% per year difference in returns. You bet turnover matters!

From The Indexer's Secret 17Jun99

 

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