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Sep 03

What Portfolio turnover is and why it’s costing you dearly

Many investors have not heard of portfolio turnover, but it’s much loved by stockbrokers, fund managers and bankers. Portfolio turnover is the frequency with which assets within a portfolio are bought and sold. Given that it costs you each time something is bought or sold and it has a big impact on your overall return, you should pay close attention to it. The manager of your money will always find a good reason to buy or sell an asset. But each time its done, they collect a bit more commission and earn bigger bonuses. When trading becomes excessive it is called churning and is unlawful. Additionally the Annual Management Charge (AMC) and the Total Expense Ratio (TER) do not include the costs incurred to you by portfolio turnover. These extra costs that are racked up for you include commissions, stamp duty and the bid/offer spread.
Some funds turnover annual turnover rate can be 500%. The average in the UK is 89%. According to the Financial Times this adds about 0.9% to the quoted TER (Total Expense Ratio). It used to be easier to find out about Portfolio Turnover, but a new piece of financial legislation (with the snappy name of UCITS IV) removed the requirement to report Portfolio Turnover in July 2011.
Portfolio Turnover seems to be important in a fund or portfolio’s overall performance. The FT reports that the 20 funds with the highest Portfolio Turnover returned an average of just 4.7% over the 3 years to February 2011. Over the same period the 20 funds with the lowest Portfolio Turnover returned 16.8%!
If you have any kind of investment, be that funds, shares, bonds or just a pension, you need to find out what the Portfolio Turnover rate is and work out how much it is costing you. Your Stockbroker or fund manager won’t like it, but you could be significantly worse off if you don’t.

1 comment

2 pings

  1. Gregg

    It is a thing I need to find more information about, thank you for the blog post.

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