Stock Fund Turnover Rates Even for Two Decades, ICI Says

November 17, 2004 ( - Despite charges of market timing in the mutual fund industry, stock funds typically do not have any more portfolio turnover than they did 20 years ago.

Although the average turnover rate of stock funds is 117% in 2004, according to an  Investment Company Institute  (ICI) Research Commentary, almost three-quarters of funds have turnover less than that. About half of stock funds actually have turnover rates less than 60% this year, ICI reports. The reason for such a high average is that a small group of select funds with high-turnover agendas are creating a skewed picture. For example, if the top 200 funds ranked by turnover rate (out of a universe nearing 4,500) are removed from the calculation, the average stock fund turnover falls more than 40%, down to 76%. These funds then, which are meant to offer investors quick in-and-outs, are skewing the overall average turnover rate.

Of the funds with extremely high turnover, key characteristics are a small number of total assets and fewer long term investors. When funds with lower turnover are viewed, larger asset totals and more long-term investors are noticeable characteristics.

A more appropriate way to look at turnover is to focus on a median figure, ICI asserts. The median turnover rate in 2004 was much lower than that of the simple average, coming in at 65%. This number is in line with the turnover rate seen over the past two decades, dispelling the myth that turnover has been on the rise as a result of market timing in a majority of mutual funds. The simple average has risen due to momentum investing strategies, according to ICI, but the median average has not moved in decades.

The ICI also attempted to dispel the myth that the median turnover rate has not risen because of the obfuscating effects of index funds. Index funds often have turnover lower than the average stock fund, but even when these are removed from the calculations, the median turnover rate is not significantly higher in 2004 than it was in the 1980s, according to the ICI.

The ICI also stressed that it is appropriate to view where mutual fund money is actually invested through the use of asset-weighted turnover rates. In 2004, the asset-weighted turnover rate for stock funds was 51%, but two-thirds of stock fund assets were invested in funds with turnover rates under 50%. This shows that shareholders tend to hold funds that have lower turnover.