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Portfolio Turnover Activity and Mutual Fund Performance

53 Pages Posted: 8 Feb 2016 Last revised: 2 Oct 2017

Claudia Champagne

Université de Sherbrooke

Aymen Karoui

York University

Saurin Patel

University of Western Ontario - Finance-Economics Area Group

Date Written: October 2, 2017

Abstract

We propose a new measure of portfolio activity, the Modified Turnover, which represents the portion of the portfolio that the manager changes from one quarter to the next. Compared with the traditional turnover, our Modified Turnover measure relies on portfolio holdings and takes into account the effects of offsetting trades and fund flows on portfolio turnover. We find evidence that high Modified Turnover predicts lower performance. The comparison between the highest and lowest quintiles sorted based on Modified Turnover reveals a difference of -2.41% in the annual risk-adjusted return. Furthermore, we find that high Modified Turnover predicts lower net flows and is impacted more by negative than positive net flows. We also find that Modified Turnover relates positively to other activeness measures while return, volatility, flows, size, number of stocks and the expense ratio are significant determinants of Modified Turnover. Overall our results suggest that frequent churning of a portfolio is value destroying for investors and signals a manager’s lack of skill.

Keywords: Modified Turnover; Turnover; Performance; Flows

JEL Classification: G11, G12, G14

Suggested Citation

Champagne, Claudia and Karoui, Aymen and Patel, Saurin, Portfolio Turnover Activity and Mutual Fund Performance (October 2, 2017). Available at SSRN: https://ssrn.com/abstract=2728689 or http://dx.doi.org/10.2139/ssrn.2728689

Claudia Champagne

Université de Sherbrooke ( email )

2500 bd de l'Universite
Sherbrooke, Québec J1K 2R1
Canada

Aymen Karoui (Contact Author)

York University ( email )

2275, avenue Bayview
Toronto, Ontario M4N 3M6
Canada

Saurin Patel

University of Western Ontario - Finance-Economics Area Group ( email )

1255 Western Road
Room 2303
London, Ontario N6G 0N1
Canada
519-661-4195 (Phone)

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