Portfolio Turnover

Definition:

Portfolio turnover is a measure of how frequently a portfolio manager changes the investments in a portfolio. It is expressed as a percentage of the securities in the portfolio that are sold and replaced with new securities in a given period.

Formula:

“`Portfolio turnover = (S – B) / A * 100%

where:

• S is the total cost of securities sold
• B is the total cost of securities bought
• A is the average asset value of the portfolio“`

Interpretation:

• A high portfolio turnover indicates that the manager is frequently buying and selling securities, which can result in higher transaction costs and potentially higher returns.
• A low portfolio turnover indicates that the manager is making fewer changes to the portfolio, which can result in lower transaction costs but also potentially lower returns.
• The optimal portfolio turnover depends on the specific investor goals and risk tolerance.

Factors Affecting Portfolio Turnover:

• Market volatility: High market volatility can lead to higher portfolio turnover as managers may need to adjust their positions more frequently.
• Manager style: Some managers have a more active trading style, which naturally leads to higher turnover.
• Investment strategy: Certain investment strategies, such as value investing, may involve higher turnover.
• Economic conditions: Economic events can cause changes in market conditions, prompting managers to make adjustments to their portfolios.

Examples:

• A portfolio manager who buys and sells securities frequently has a high portfolio turnover.
• A portfolio manager who holds investments for a long-term period has a low portfolio turnover.

Additional Notes:

• Portfolio turnover is a measure of portfolio activity, not performance.
• It does not include any cash flows from or to the portfolio.
• Some managers may use a turnover ratio that includes only the cost of securities sold, rather than the cost of securities sold and bought.
• It is important to consider portfolio turnover in conjunction with other portfolio metrics, such as return, standard deviation, and expense ratio.