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Portfolio Turnover Ratios (PTRs): Break away from the flock

February 3, 2014 by Editor, InvestingForMe

Did you know there’s actually a name used by investment industry insiders to describe retail investors that blindly, mindlessly follow investment recommendations? They call those investors sheeple (that’s sheep + people). And as we discussed in our previous article it would appear that Canada has a lot of sheeple when it comes to investing in mutual funds and exchange-traded funds (ETFs).


But it’s time we sheeples take to educating ourselves about our own investments if we want to improve our investment rates of return and make better investment decisions beginning with learning how to use PTRs.

PTRs: what they can do for you

Here are three simple reasons for you to care about a fund’s PTR:

  1. A fund’s PTR can help you identify an investment manager’s real investment style (buy and hold vs. day trader) and ensure that it fits with your investment approach.
  2. The higher a fund’s PTR, the greater the trading costs payable by the fund in the period, and the greater the chance of an investor receiving taxable capital gains in the period. In other words, if there’s more trading going on with this fund, chances are you’re going to run into more expenses in the form of capital gains for the trades made during that time frame. So, you have to remember that these trading costs are not typically included in a fund’s Management Expense Ratio (MER), so trading costs from PTRs are yet another extra cost you’ll want to watch out for on your bottom line.
  3. Not only does a high PTR increase investment costs, but it also decreases your rate of return. In fact, according to Morningstar, over the past decade, mutual funds with the highest PTRs have underperformed funds with lower PTRs by an annual average of 1.8 percentage points. That’s 1.8% less for you each and every year. You don’t think that sounds significant? Well, over a 20-year time frame, a $100,000 investment would lose $38,624.00! Now, I don’t know about you, but for me that’s a lot of money!

So, where do I find a fund’s PTR?

Typically, a fund’s PTR is disclosed in the fund’s Management’s Report/Discussion of the Fund’s Annual Performance (MRFP). And here’s how you find that:

  1. Locate the fund company’s website and then click on the webpage for the specific fund you want to look at. For example, here’s the page for iShare’s S&P/TSX Canadian Preferred Share Index Fund (CPD).
  2. Next search the webpage for the fund’s Documents section. In this listing look for the report that is the MRFP. Sometimes the document’s title will have MRFP in its title. 3. Search the MRFP for the fund’s Ratios and Supplemental Data (typically you’ll find it in a table format). There you’ll find listed the fund’s PTR.

Note: Different PTRs for different investment approaches

Before you decide whether a fund’s PTR is a match with you and your investment approach (conservative vs. active trader), here’s a few guidelines for judging a fund’s PTR. It’s important to remember that different investment approaches will result in different PTRs. For example,

  • a fund with an active investment mandate with literature that talks about value, momentum, emerging markets, etc., should probably be expected to have a higher PTR than a fund investing for steady dividend income.
  • a fund investing in fixed income investments (such as bonds, preferred shares, etc.) should have a lower PTR than a fund that invests for growth – mostly in the stock market.

A few guidelines around PTRs

So, when it comes to analyzing and comparing two or more funds with the same or similar investment objectives compare their PTRs to see which one is the best deal for you.

Here are a few basic guidelines to consider when it comes to analyzing PTRs:

  • Typically, for funds investing in the stock market, if the manager generates a PTR greater than 100%, then I think you can legitimately ask, What’s this manager doing – investing or day-trading? And if you want a manager to day-trade your savings, then, I guess, have at ‘er!
  • But if you consider yourself to be a conservative investor, then maybe it’s time to move on and find a manager that invests your savings in a way that’s closer to your own investment style.
  • As a rule of thumb, when you’re looking at ETFs and funds that invest in bonds and preferred shares for income and stability, you should expect a PTR between 20% and 30%.
  • Indexed Funds should have low PTRs, no matter what their category.

Remember: Whatever the category of the mutual fund or ETF, the lower the PTR percentage the better – lower costs and better performance. And while the PTR is not fixed and will change from one year to another, look for consistency (i.e. no wild swings one year from the next). Avoid funds that have inconsistent or erratic PTRs. For example, a PTR at 30% one year, 150% the next, and then 40% is a sign that the fund managers may not be following the fund’s stated objectives. Remember, the PTR is within the control of the fund’s investment manager and should consistently fall within a reasonable range.

So, look at that. A few pointers around PTRs and you’re off to becoming a much more informed investor who can keep an eye on some of those extra hidden tricks and costs in the investment industry … all in the name of protecting your hard earned savings and investments.

Next time we’ll take a look at two popular mutual funds with the same investing objectives and mandate, but with dramatically different PTRs.


(This aricle published byTroy Media)

Read the 1st article in this series -Do you know where your investments are when you go to sleep at night? 



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