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April 1, 2010

Portfolio Turnover Up During Crisis

By Peter Chapman

Portfolio turnover rose sharply during the 2007-2009 financial crisis, a new study reports.

According to a joint study by pension consultant Mercer and the Investment Responsibility Research Center Institute, traditional money managers executing long-only strategies increased their turnover anywhere from 12 to 16 percent between June 2006 and June 2009.


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In the second quarter of 2006, growth managers reported turnover of 82 percent. That figure reached 93 percent by the second quarter of 2009.

Value managers reported similar increases. In the second quarter of 2006, value managers reported turnover of 64 percent. That figure reached 73 percent by the second quarter of 2009.

Turnover is a measure of how long a stock remains in a portfolio. It is calculated by dividing the value of all purchases or sales, whichever is lower, by the fund's net asset value. A ratio of 100 percent, for example, implies the fund replaced all of its holdings during the period in question. Higher turnover is often associated with higher trading costs.

According to the study, turnover took off at midyear 2007. That was just after the travails of two Bear Stearns hedge funds became public.

The study's authors conclude that the credit crisis and the related market volatility probably exacerbated the upward swing in turnover. They question, however, whether the higher turnover was a consequence of the volatility or, in fact, caused the volatility.

The study surveyed 991 equities investment strategies, involving trades of U.S. and foreign stocks in all size capitalizations. Mercer's database covers 19,000 strategies of 3,600 active managers. The study did not include hedge funds.

On average, over the three-year period, average annual turnover stood at 72 percent. The vast majority of managers surveyed fell between 40 and 80 percent annual turnover. Small-cap portfolios turned over more often than large-cap portfolios--88 percent versus 69 percent.


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