Study Throws Light On UK Equity Fund Trading Costs

by Phillip Morton, Investors Offshore.com

02 April 2004

The latest research from leading independent investment fund research company Fitzrovia International has revealed that a quarter of all actively managed equity funds in the UK have portfolio turnover levels above 96% a year.

According to the firm’s second report on the subject, on a conservative assumption, the group of most actively traded funds have estimated trading costs of at least 0.96% each year, compared with 0.55% for the median fund. For those funds investing only in the UK, the most actively traded funds have estimated trading costs of at least 1.14% each year, compared to the median of 0.72%, highlighted the report.

Furthermore, while funds that invest solely in the UK generally have lower portfolio turnover levels (the highest 25% of these funds have turnover levels above 76.2%), the associated trading costs are higher due to the impact of stamp duty.

Meanwhile, Fitzrovia reported that at the other end of the scale, a quarter of all actively managed equity funds have portfolio turnover levels below 32.8%, with estimated trading costs of up to 0.33% each year. For funds investing in the UK the turnover level falls to 25.3%, but estimated trading costs are up to 0.38% each year.

Ed Moisson of Fitzrovia International commented: “Portfolio turnover can be a crucial part of establishing whether a fund is doing ‘what it says on the label’.”

“For example, high portfolio turnover for a fund claiming to be very actively managed is an indication that it is being managed in the anticipated way. On the other hand, a fund with higher turnover, but with a more conservatively stated management style should prompt the fund manager to explain the reasons for such regular changes to the portfolio,” he observed.

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