The Constant Investor | What’s the one question investors should ask a fund managers?

What is the percentage turnover of the fund based on any 12-month period?

2 NAOS Sebastian Web Ready (Square).jpgThe turnover of a fund is simply the dollar value of either the total amount of sell or buy trades completed (whichever is lower). If you divide this figure by the average fund size it will then give you the percentage turnover i.e. if the total buy trades are $5,000,000 and the average fund size is $10,000,000 then the turnover is 50% p.a.

Many fund managers can talk about their philosophy, process and being true to label but often investors only see the annualised performance figures. Performance, especially annualised performance can often be somewhat limited in the insight it gives investors, as it does not give a true picture of the underlying investment process, and most importantly, the ability of the investment team to produce excellent risk adjusted returns year after year.

For example, if a fund has a turnover of 180% this implies that the investment team has been able to find many initially undervalued companies over the course of the year, sold the positions once they have been re-rated by the market, and have found a significant number of new opportunities all in a 12-month period.

If a fund manager preaches long term investing, and getting to truly understand companies and their management teams, ask yourself if the turnover rate of the fund is significantly over 100%, how can they find so many undervalued companies that re-rate in such a short period of time? This can often be a signal that they may not be offering a ‘true-to-label’ product, and could be a sign that a fund manager has a fund size that is potentially too big for their designated investment universe.

The Constant Investor FUNDamentals: Published 1 August 2017

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