The Long and the Short: Portfolio Turnover Ratios & Mutual Fund Investment Time Horizons

By Tucker, Anne M. | Journal of Corporation Law, Spring 2018 | Go to article overview

The Long and the Short: Portfolio Turnover Ratios & Mutual Fund Investment Time Horizons


Tucker, Anne M., Journal of Corporation Law


I. INTRODUCTION II. PORTFOLIO TURNOVER RATIO: U.S. CALCULATION AND USES        A. UCITS Alternative III. PORTFOLIO TURNOVER RATIO DATA IN PUBLIC DEBATES        A. The Portfolio Turnover Ratio Signal Strength & Criticisms            1. Time Horizon & Transaction Cost Estimates            2. Common Critique: Strategy & Liquidity.            3. Common Critique: Round Trip Trades            4. Common Critique: Asset Classes & Rare Events            5. Common Critique: Tax-Specific Concerns        B. PTR Uses            1. A Literature Review of PTR                a. PTR in Legal Literature                b. PTR as Investment Time Horizon Estimate                c. PTR as a Transaction Cost Estimate                d. Limitations of Portfolio Turnover Ratio Calculations                e. Law & Policy            2. PTR in Finance Literature            3. PTR in U.S. Policy & Business Debates.                a. U.S. Legislation & Policy.                b. Business & Industry Reports IV. REMEASURING PORTFOLIO TURNOVER RATIOS        A. PTR Data        B. Mutual Fund Time Horizon PTR Re-measurement Methodology            1. Overview of Measure            2. General Portfolio Turnover Ratio Trends            3. Trends by Fund Cap & Style Codes        C. Robustness Checks: Alternative Measures of Mutual Fund          Investment Time Horizons            1. Duration Measure                a. General Duration Trends                b. Duration Trends by Style and Cap Codes            2. Churn Rate                a. Churn Rate General Trends                b. Churn Rate Trends by Fund Style & Cap Codes            3. Modified Turnover Rate                a. General MT Trends                b. MT Trends by Fund Style and Cap Codes V. DATA DISCUSSION        A. Average Holding Periods PTR & Alternative Measures        B. Signal Strength: Relationship Between PTR & Alternative          Measures            1. Limitations of Empirical Observations        C. Mutual Fund Turnover Report & Time Horizon Estimate            Recommendations VI. CONCLUSION. VII. APPENDICES        A. Appendix 1: Top 10 Public Companies by Market          Capitalization & Top 10 Institutional Holders.        B. Appendix 2: Count & Analysis of PTR in Literature        C. Appendix 3: PTR Sources in the Congressional Record by          Hearing & Date        D. Appendix 4: Annual Mutual Fund Data by Measures & Years        E. Appendix 5: PTR Mean Distributions by Measure and by Year        F. Appendix 6: Correlation & Regression Data 

I. INTRODUCTION

Mutual fund investment time horizons are central to the short-termism debate. (1) Short-termism is a general, negative diagnosis for an inappropriate and unjustified focus on short-term gains or earnings, usually measured in quarters, over long-term returns. (2) Using a unique dataset, this Article evaluates the investment time horizons of all U.S. registered mutual funds from 2005-2015 using the SEC reported metric of portfolio turnover ratios (PTR) and three alternative measures developed in the finance literature: Duration, Churn Rate, and Modified Portfolio Turnover. With this dataset, I contribute to two foundational inquiries. First, how long, on average, do mutual funds hold onto their assets? Second, how good of a measure is the PTR at approximating mutual fund holding patterns?

As I demonstrate below, the assumption that mutual fund investor time horizons have been shortening during the past decade are incorrect. They are short--in the range of fifteen to seventeen months--but not shortening. Rather, mutual fund time horizons have remained relatively constant, between 2005 and 2015, with evidence of increased holding periods following the financial crisis. These findings are consistent across three of the four measures (3) and analyzed across different mutual fund market segments.

Recent empirical data on mutual fund holding patterns add nuance to a common narrative attributing corporate short-term performance pressures to institutional investors, including mutual funds. …

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