Mutual Funds @ Super Highway

Article by Louis Lowenstein about the turnover rate of the mutual funds (unit trust).

Have you ever care about how fast your fund managers changing their portfolio? The answer? 100% and for some even as high as 305% per year!! What is this means? That means holding period of the portfolio is less than a year (100% per year) or less than 4 months (305% per year)!! While purchasing the fund, the promoters always tell you “invest for long term”, at the same time, they are doing the reverse. “Long term” by their definition seems less than a year from their action.

In any business, a period of a year seldom gives you a clear picture of how a company performs. In such a short period, very often the performance of the company is merely a luck. If the company delivers a handsome result this year, you can’t just assume the same result will repeat for next years. For example, in 2004, steel production companies enjoyed a handsome result but the reverse happened in 2005.



The high rate of portfolio turnover by fund managers only indicates their speculative mentality. They try to time the market and most often they are wrong. When the management fee is tied to the size of the fund and their net worth is not tied to the fund they manage, there is no wonder why irresponsible action occurs.

The funds managed by managers with speculative mentality would only deliver a poor result to their fund holders. The result could be as wide as 18% per year over the period of 5 years as compared to value-oriented funds. With compounded effect, if you invest $ 10,000 and the difference is 18% per year, see the difference:

Year Value Fund Speed Fund Difference (%)
0 10,000 10,000 0
5 22,878 10,000 129
10 52,338 10,000 423
20 273,930 10,000 2,639
30 1,433,706 10,000 14,237

Will you invest in Speed Fund anymore??