The Long and the Short: Portfolio Turnover Ratios & Mutual Fund Investment Time Horizons
Journal of Corporation Law, v. 43, no. 3, 2018
68 Pages Posted: 18 May 2018
Date Written: May 4, 2018
Mutual fund portfolio turnover ratios (PTR) are at the center of the short-termism debate, which criticizes corporate maneuvers taken to prop up near-term earnings at the expense of long-term, value focused investments and policies. Scholars and policymakers often rely on portfolio turnover ratios to argue that mutual fund short-termism, as measured by the PTR, is increasing and infecting operating company time horizons. This article answers two main questions central to discerning mutual funds’ role in the short-termism debate. The first is, how long, on average do U.S. registered mutual funds hold onto their assets? The second is, how good of a measure is the PTR at approximating mutual fund holding patterns in light of criticisms that the PTR is an indirect measure, does not reflect fund flows, and excludes investment strategy considerations?
Using a unique data set of U.S. registered mutual funds from 2005–15, this Article finds that mutual fund investment time horizons, as measured by portfolio turnover ratios, did not decline during 2005–15. This finding holds for all major categories of mutual funds, including index funds and actively managed funds and produced an average holding period in the range of fifteen to seventeen months. Based on this analysis, scholars and policymakers may think of mutual fund investment time horizons as short, but not shortening. These findings are confirmed by three alternative measurements of time horizons: Duration, Churn Rates, and Modified Portfolio Turnover. Consistent across-measure results mitigate PTR criticisms as a rough estimate of time horizons and endorse its continued use in SEC reporting. These observations also validate policymakers’ and scholars’ use of mutual fund PTRs in legal and policy debates, and contribute current, empirical evidence adding nuance to claims of mutual fund short-termism.
Keywords: business law, corporate law, corporations, mutual funds, turnover, portfolio turnover ratios, short-termism, long-termism, economics, investment time horizons
JEL Classification: G11, G23, K22, K39, D22, G19, G30
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