Fund managers exceeding stated turnover: report

Many institutional investment strategies record turnover significantly higher than their stated levels, according to a Mercer and IRRC Institute study.

The report, 'Investment Horizons — Do Managers Do What They Say?', found nearly two-thirds of institutional investor-focused investment strategies exceeded their expected turnover from June 2006 through June 2009. Of these strategies, the turnover was on average 26 per cent higher than claimed, with some strategies reporting turnover between 150 and 200 per cent more than expected.

Helga Birgden, Mercer’s head of responsible investment, Asia Pacific, said the results might indicate broader issues and that transparent communication is needed.

“If fund managers’ actual trading behaviour produces higher turnover than what they tell their clients it will be, it may signify deeper problems with investment processes. If there is deviation between the ways a strategy is managed and how it is being marketed to clients, fund managers need to be upfront and explain why.”

Jon Lukomnik, program director for the IRRC Institute, said the study indicated that short-term investing is a systemic issue, rather than limited to particular sectors or products.

“When managers greatly exceed their expected turnover level, the impact can be significant in terms of cost, performance, and risk that the strategy is not being managed in line with its stated investment approach,” Lukomnik said.

Some reasons for the higher than expected turnover included volatile markets and changing macroeconomic conditions, mixed signals from clients, short-term incentive systems and behavioural biases.

Fund managers indicated that short-termism potentially places short-term pressure on companies, increases market volatility, demonstrates a lack of discipline in fund managers’ investment processes, and creates a misalignment of interests between fund managers and their clients.