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High Turnover Yields Increased Profits, Study Finds

A new study finds that active mutual funds that trade more outperform. The researchers reviewed a sample of 3,126 equity mutual funds over a period of 31 years and found that funds with a one standard deviation increase in turnover yielded 0.65% higher annual returns. The results are consistent with the researchers’ hypothesis that “[a] manager trades more when he identifies more alpha-producing opportunities, so a skilled manager should perform better after he trades more.” The results were even more pronounced for small, high fee funds. The authors suggested that these funds likely have an increased ability to take advantage of opportunities and that the high fees are consistent with the fund manager’s greater skill in identifying the opportunities. The researchers did find, however,  that the correlation between high trading and increased profits decreases when funds “act more in concert.”

A Reuters article discussing the paper can be found here