“The ideal holding period is forever,” says Warren Buffett, whose investing skills have made him the world’s second-richest man.
Lesser fund managers generally accept his premise that you should buy stocks for the long term – or at least they say they do.
But the numbers tell a different story. The average annual turnover for UK funds has risen from just over 40 per cent of assets in 1990 to almost 150 per cent of assets today, according to Financial Express, a data provider.
In other words, the average holding period for a stock has fallen from two and a half years to just eight months – a long way from Buffett’s “forever”. While fund managers profess to want long-term relationships with companies, they actually prefer to love them and leave them.
There are implications for investors as high turnover adds to costs, increasing the performance drag for investors. Typically, a trade costs anywhere from 0.2 per cent to 5 per cent of the assets traded. If you assume costs per trade of 1 per cent, then by raising the average holding period from eight months to 16, you would reduce a fund’s trading costs by 0.75 per cent a year.
Financial Express based its portfolio turn-over on funds’ top 10 holdings over the past three months. Some, such as Fidelity’s American Special Situations Fund, have changed their entire top 10, while others, such as Invesco Perpetual’s World Income Fund, have seen no change at all.
Invesco Perpetual prides itself on taking a long-term, buy-and-hold approach. Its four biggest funds, with a combined £14bn under management, averaged turnover of 24 per cent last year, implying an average holding period of four years.
“When we’re doing our analysis of stocks we are generally looking to make our returns over three to five years,” says Mitchell Fraser-Jones, an Invesco Perpetual product manager. “We put a great deal of importance on a company’s management and having a close relationship with them.”
Fraser-Jones adds that long holding periods reduce the probability of a negative return on an individual stock.
Peter Thompson, chief executive of Taylor Young Investment Management, endorses the low-turnover approach. He says increased pressure to deliver good returns every quarter has made fund managers reduce their holding periods for stocks.
Particularly in the small-cap arena, he adds that getting to know company managers, and even influencing their decisions, is important. Low turnover is also appropriate for small-cap stocks because they are expensive to trade – Thompson says the cost of selling shares in a company with a market cap of £50m-£100m can be 5 per cent of the shares’ value.
Another fund that aims for low turnover is the Unicorn Outstanding British Companies Fund, which is being launched this month and aims to hold stocks for 10-15 years.
But low turnover is no guarantee of outperformance, nor does high turnover preclude successful fund management.
Some types of fund, such as technology and growth funds, tend to have higher turnover. And this can translate into higher returns. The Franklin Aggressive Growth Fund achieved a 7.6 per cent return in 2005 against 3.9 per cent for the R3000 Growth Index, despite turnover of 150 per cent.
If you run your own portfolio, keeping turnover low is a good idea as dealing costs can be high for small investors.
