U.S. equity commissions have been flat to lower for the last several years, and now the market knows why – institutional money managers have been cutting back their trading activity.
But will this trend last?
AbelNoser Solutions(ANS) released a new report that noted this phenomenon – that following the 2007-8 financial crisis, U.S. money managers held stocks in portfolio longer than prior the market event. The study found that the “turnover ratio”-a measure of how often stocks in a portfolio are replaced with new securities-peaked in the third quarter of 2008 and rapidly declined before bottoming out in the second quarter of 2014.
“Utilizing proprietary data, our study provides a unique window into the behavior of institutional investors since the beginning of the Great Recession,” said Ted Morgan, chief operating officer of ANS. “For the past six years, we’ve witnessed the ‘bull market no one can believe,’ where stocks reached new highs while trading volumes and volatility were left behind.”
Morgan added that money managers had little incentive to trade because stocks moved in lockstep with signals from the Federal Reserve. But now with investors assuming that interest rates will rise in the not-too-distant future, they are expecting correlations between stocks to decrease, prompting them to trade more to generate market-beating returns.
Among the reports key findings:
– The average annual turnover ratio peaked in the fourth quarter of 2008 at 207% and troughed in the second quarter of 2014 at 112%. For the first quarter of 2015, the most recent period for which data is available, the turnover ratio was 127%.
– Larger managers continue to see their turnover ratios drop. The largest firms turned their portfolios at an annual ratio of about 134% in the fourth quarter of 2008. In the first quarter of 2015, that figure was 60%.
– Small and medium size managers did not see the same decline in turnover as the largest fund managers. In addition, the change in assets under management for these institutions did not correlate to the performance of the broader market.
To conduct the study, ANS analyzed the historical trading records of a select group of 30 institutional investment advisors. The institutions were both passive and active managers. To determine the turnover ratio, ANS calculated each institution’s equity trading volume in dollars, and divided that by the assets under management figure listed in the firms’ SEC filings.
Abel Noser Solutions is an independent, broker-neutral transaction cost analysis (TCA) company, measuring over $7.5 trillion dollars in traded principal annually in equities, and $3.5 trillion in FX.
