Congratulation to Professor Aymen Karoui ! His article ‘Portfolio turnover activity and mutual fund performance ‘ published in Managerial Finance and co-authored with Professors Claudia Champagne (Sherbrook University) and Saurin Patel (University of Western Ontario) has been selected by the editorial team as an Outstanding Paper in the 2019 Emerald Literati Awards. The article was chosen as a winner as it is one of the most exceptional pieces of work the team has seen throughout 2018.
All our award winning papers and reviewers can be found on the Literati awards page.
In this paper, we propose a new measure of portfolio activity, the Modified Turnover, which represents the portion of the portfolio that the manager changes from one quarter to the next. Compared with the traditional turnover, our Modified Turnover measure relies on portfolio holdings and takes into account the effects of offsetting trades and fund flows on portfolio turnover. We find evidence that high Modified Turnover predicts lower performance. The comparison between the highest and lowest quintiles sorted based on Modified Turnover reveals a difference of -2.41% in the annual risk-adjusted return. Furthermore, high Modified Turnover predicts lower net flows. We also find that Modified Turnover relates positively to other activeness measures while volatility, flows, size, number of stocks, and the expense ratio are significant determinants of Modified Turnover. Overall, our results suggest that frequent churning of a portfolio is value-destroying for investors and signals a manager’s lack of skill.