Portfolio Turnover Slams Returns

Funds that trade the most, whose brokerage costs take a big bite out of returns, are performing even worse than funds that trade the least, The Wall Street Journal reports, citing figures from research firm Morningstar.

For the 12 months ended Monday, the 1,730 funds with the highest turnover had a loss of 20.9%, compared with a 19.1% loss for an equal number of funds with the lowest turnover, according to Morningstar, which reviewed about 5,200 U.S. stock funds. During the three years ended Monday, high-turnover funds lost an annualized 14%, compared with an 8% loss for low-turnover funds. Over five years, active-trading funds lost 2.3% annually, compared with the average 0.8% loss for slow-trading funds.

An earlier report by Lipper, based on a review of 3,700 stock funds for which Lipper had updated information on their brokerage-commission payments, found the funds paid about 0.46% of their assets annually in brokerage commissions, on top of the average expense ratio of 1.3%.

Some financial advisers suggest that funds with hyperactive trading activity should go in a tax-deferred account such as a 401(k) plan or an individual retirement account, since high turnover often leads to high taxable distributions of capital gains.

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The staff of Mutual Fund Market News ("MFMN") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MFMN, and have not prepared, sponsored, endorsed, or approved these summaries.

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