Being that I’m of a certain age where most of my formative years were computer-less I have been forced to rely on experience and observation as a foundation to justify a strategy when data was unavailable to prove a point. Running the portfolios for a small firm gives us an advantage in attention to detail that might be impossible for much larger institutions. We run portfolio performance on a daily basis which allows us to spot excelling and lagging portfolios and fix the laggards.
This attention to detail can cause a portfolio to have a turnover in excess of 200% a year. Sound like alot? It may if you’re used to mutual funds where the turnover is hidden from the fund holder, but on average 200% is not excessive to most Growth mutual funds.
For most of my 25 years of trading, I’ve fielded questions to the value of portfolio turnover. The typical questions revolve around the expense and justification of the culling of dead money or losing holdings. Inherent within the reasoning of the questioner is the premise that somehow “Lower turnover is better”.
This morning I ran portfolio simulations for varying review periods for our model portfolio, which we put into live trading early this year, results are as follows:
“Review” refers to the evaluation of all holdings where positions are added or deleted by our proprietary ranking system.
Simulation range 3/31/01 to 10/24/09. Returns are annualized estimates.
Daily Review: +16.95%
Weekly Review: +16.46%
Monthly Review: +12.62%
Six Week Review: +12.24%
Three Month Review: +13.19%
Six Month Review: +12.94%
Benchmark comparison (S&P 500): -6.96%
In sum, the data means that using our proprietary model if I only review a portfolio once every month, the account will underperform a portfolio that is monitored daily by an average of 4.33% annually. Ouch!
As the evidence shows there is significant value to maintaining an active portfolio, where every holding is evaluation to the potential merits of contributing to the return of a portfolio. While a certain amount of patience might be a virtue in other professions, holding a stock that is not participating in a market advance is equivalent to dead money. This is not to be confused with rapid trading, day trading or the ilk, but by allowing winning stocks to be held for extended periods of time and culling laggards our clients have a better chance of exceeding the market averages.
Returns are hypothetical, include trading expenses and slippage but not including management expenses. As usual, past performance can never guarantee future results.