Portfolio Turnover Ratio: how fund managers go about stock selection?

India Infoline News Service | Mumbai | June 16, 2015 08:18 IST

One must bear in mind, though, that PTR is not an assigned mandate, it only reflects the manager’s investment style.

Have you ever wondered how fund managers go about stock selection? Do they adopt a buy and hold approach or do they look for short term gains by focusing on momentum? No matter how hard you try, it’s not possible to chase a fund manager’s approach all the time. However few metrics can help you know more about a fund manager's investment style.

One such key metric is the Portfolio Turnover Ratio (PTR). It indicates the traded frequency of stocks of the respective portfolio in the previous year. A higher PTR implies hectic buying and selling while a lower PTR implies low trading activity. A PTR of 1 means the fund manager has churned the entire portfolio at least once in the given period. Funds with higher PTR point to a 'dynamic' investment style which implies that fund manager utilizes the cash more aggressively compared to what one does for conventional low-risk equity funds. One must bear in mind, though, that PTR is not an assigned mandate, it only reflects the manager’s investment style.

Going by past records, funds with a consistently lower PTR have delivered better returns compared to funds with a higher PTR. Those fund houses that swim against the current or those who shun the rat race find it prudent to adopt a buy-and-hold approach rather than chasing stock momentum. A higher PTR also implies higher transaction costs which over time can cumulatively erode a substantial part of your fund returns.  
 

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