Does Portfolio Turnover Exceed Expectations?

Abstract

This comparison of expected versus realized turnover in institutional equity portfolios reveals that 65%of portfolios turn over more than expected, some by large amounts.Manager interviews indicated they were aware that excessive turnover was potentially harmful to their clients. They cited volatile markets, hedge fund activity, signals from clients, and short-term incentives among the causes for their actions. Pension funds would be wise to include an expected turnover rate in their manager mandates, and to ask for an explanation when the actual turnover rate significantly exceeds that expectation.

Keywords: Churn, Institutional Asset Management, Short-termism, Investment Horizon, Pension Fund, Turnover