What is this thing called "Mutual Fund Turnover?"

oneopinion left a comment and asks: "...why is high turnover a negative in a mutual fund and why do you set a turnover rate of 100% as the maximum?"

Thanks for the question. First, let me clarify, I did not set 100% as a maximum, and I do not have a maximum for new picks for my hypothetical portfolios. I do, however, prefer low turnover so lower expenses or much better long term performance would be necessary for me to choose a fund with high turnover over a comparable choice.

The question was why?

The hypothetical portfolios I have been tracking are for a non-retirement account so any capital gains would result in hypothetical taxes owed and higher turnover is more likely to lead to more capital gains

Morningstar.com defines turnover ratio:

"This is a measure of the fund's trading activity, which is computed by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly net assets. A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded. In practical terms, the resulting percentage loosely represents the percentage of the portfolio's holdings that have changed over the past year. A low turnover figure (20% to 30%) would indicate a buy-and-hold strategy. High turnover (more than 100%) would indicate an investment strategy involving considerable buying and selling of securities. Morningstar does not calculate turnover ratios. The figure is culled directly from the financial highlights of the fund's annual report."

The Motley Fool sums it up thusly:

"Turnover Rate and Taxes. A fund's turnover rate basically represents the percentage of a fund's holdings that it changes every year. A managed mutual fund has an average turnover rate of approximately 85%, meaning that funds are selling most of their holdings every year. Because buying and selling stocks costs money through commissions and spreads, a high turnover indicates higher costs (and lower shareholder returns) for the fund. Also, funds that have large turnover ratios will end up distributing yearly capital gains to their shareholders. Shareholders will have to pay taxes on these gains, and paying these taxes can be a real killer. Keep an eye on the turnover rate of any fund you own, and look to own funds with low (preferably no higher than 25%) turnover rates. (Index fund turnover is around 5% or lower.)"

Emphasis added.

I have no idea why fool.com claims that index fund turnover is 5% or lower. In my portfolios of index funds and ETFs almost all the funds have turnover much higher than 5%.

Take VIGRX Vanguard growth index. It has a turnover ratio of 28%. Not bad, but nowhere close to 5%.


Portfolio Update 11/23/07 Emerging Markets and Domestic Bonds

Updating at the end of the week tends to smooth over the craziness that happens day to day. This past week stocks plummeted mid week, only to recover much of the loss on a big Friday Rally.

The WylieMoney 20 Mostly Managed Portfolio retains the lead, but the simple Three Fund Index portfolio is proving to be a contender.

When you look at the performance of all of the portfolios since May 1st, you will find that the top performer is Emerging Markets though these past two weeks have ended with a sharp decline in Emerging Market funds (SSEMX down over 13% since Halloween!). What may be surprising is that in many cases, the second and third best performers, better than general international index funds, are domestic bond funds. Click on the images below for a larger view. Are you reading anywhere else that domestic bonds have out-performed even international equity funds (excluding emerging markets) over the last 6 months?

When investors move from stocks to bonds, that often portends ruin:

Will that be the case for 2008? Only time will tell.

WylieMoney 20 Mostly Managed

Three Fund Index

Lazy 20 Mostly Index

WylieMoney Slowly

ETF 20

S&P 500

Portfolio Update 11/16/07 S&P takes baby step forward

Even though I did not post, I did take screen shots from the first Friday of my trip.

WylieMoney was still significantly in the lead (5% better than the S&P 500 since May 1st) and WylieMoney slowly was still best year to date, but the Three Fund Index had a great day comparitivley and the S&P 500 had the best week making up a tiny bit of ground.

WylieMoney 20 Mostly Managed

Three Fund Index

Lazy 20 Mostly Index

WylieMoney slowly

ETF 20

S&P 500

A visit to the Oracle!

I apologize for not posting recently. I had an errand to run. I went to visit the Oracle at Delphi to figure out what the economy will look like in the future...

Surprisingly, I got the answer! I made my way back to Athens to celebrate and then catch a flight back to the US and invest accordingly. I decided to celebrate with some Greek Liquor.

I had a little ouzo, but did not stop there...

When I woke up the next day under the Acropolis, I had no memory of what the Oracle told me. All I can say is that what they say about the dollar is true.

Once I made it back to the states, I headed to Cape Cod for some R&R.

Now to catch up...


Etrade, SIPC Coverage and Margin accounts

John left a comment pointing out that SIPC insurance does not necessarily cover everything in a brokerage account. He specifically mentions margin accounts, and links to this pdf. (Thanks John!)

I called Etrade this morning to close my margin account. I was on hold for 10 minutes and got through to a very friendly customer service rep who took care of this for me. I actually have no activity on margin so I don't think this mattered for me, but since I don't intend to use the margin account anytime soon, I closed it to keep things simple. If you do have and use a margin account (you should not have one by default- I set mine up years ago, but never used it), make sure you understand what is and is not covered by SIPC.

The pdf mentions:

"Excluded from coverage are: unregistered investments (i.e., limited partnerships), commodities, currencies and options. And remember, SIPC doesn’t protect against investor

If you have any questions or are at all uncertain about what is and is not covered by SIPC in the event your brokerage closes shop, even if you use a brokerage other than Etrade, WylieMoney strongly encourages you to follow up with a financial professional!

I, for one, hope Etrade pulls through. I have certainly had issues with them, but on the whole, their interface is great, the funds they offer are good, their costs are reasonable (as long as you meet the minimum balance requirements!).


Portfolio update- ETFs in the Red!


The S&P 500 as represented by the ETF SPY and the portfolio of 20 ETFs have both lost money since May.

The folks at Morningstar chose today to claim that SPY is the next hot thing!!!! It certainly did better today than all the other portfolios, only losing 0.99%.

The WylieMoney Slowly portfolio that I am adding to one fund per month is also showing a loss. The WylieMoney Slowly portfolio is curious as it is close to flat with almost all the equity funds in the red, but the bond fund up a strong 12.42% (see below).

WylieMoney 20 continues to perform best out of all the portfolios I am tracking, both real and hypothetical.

Now that's a sad chart:

And that's a lot of red...

WylieMoney 20 Mostly Managed

Three Fund Index

WylieMoney Slowly

Lazy 20 Mostly Index

ETF 20

S&P 500

Is Etrade going to go out of Business?

Etrade is having trouble.

Will they go out of business?


Does it matter?

Well it would be a HUGE pain in my @#$@%!. But...

"E*Trade brokerage accounts are insured by the Securities Investor Protection Corporation, which can cover investors for up to $500,000 in cash and securities should a member broker go out of business, according to the SEC's Web site."


" Since the Federal Deposit Insurance Corp. guarantees bank accounts up to $100,000, customers with larger balances may move their money elsewhere, said Bhatia..."

What does all this mean? If you have more than $100,000 in cash at Etrade's bank or and/or more than $500,000 in cash and securities in an Etrade brokerage account, you should change that tomorrow. There is no point in risking your savings.

I don't have to worry, so I'm staying put. The hassle of having to deal with the SIPC if the brokerage unit collapses is less than having to try and document my transaction history.

I think a likely scenario is that another brokerage tries to buy Etrade, assuming they can end up with all the accounts without the bad debt... which would be a major bummer. Their site is very nice and the funds they offer are good.

I guess we'll see.

Last 6 Months Best and Worst

When looking at the portfolios I have been tracking since May 1st, the best individual funds are Emerging Markets funds, by a wide margin. Natural Resources as a Sector were the next best. I did not include Natural Resources as a category/sector in the hypothetical portfolios I created, but it shows up here because I actually own it. Foreign funds have also done very well, but Janus Overseas makes the top 5 here because it invests in Emerging Markets as well. When Emerging Markets tank, JAOSX will likely tumble right along with them.

The worst performers were Real Estate and Financial/Value stocks.

Where's last week's update?

I did not realize that the markets were open today. So all the values of ETFs in my portfolios have changed since last Friday.

Rather than compare last Friday's closing prices to today's ETF trading prices, I will post an update using tonights closing prices for all the portfolios.

Here is a visual representation of what can happen when you overlook the details!



Lazy Portfolios Can't Keep Up

Exactly one year ago today I started this blog. Happy Birthday WylieMoney!!!

I started an experiment to put together a hypothetical portfolio of no-fee no-load mutual funds, available through a single brokerage, and see if it would outperform comparable index fund portfolios. I set up the portfolios on May 1st, so Halloween was 6 months in and I figured it was time to take a detailed look at how things are going.

For those of you who don't want to read my ramblings and just want to know which portfolio won at 6 months out, the answer is the WylieMoney 20 Mostly Managed portfolio won... handily:

If you read financial magazines, websites and blogs, you'll find endless articles making the claim that index funds are better than managed funds.

Here is the latest. Articles like this one bother me because the logic is flawed.

The fundamental argument is this:

"And when you step back and look at the performance of actively managed funds vs. index funds over long periods of time, you'll find that index funds tend to beat the majority of actively managed funds."

What I take away from this is that I should not buy the majority of actively managed funds. (As if I could afford it!) What Walter (the author) implies is that managed funds are therefore, the wrong way to go. Where the logic fails for me is that what the performance of all managed funds as a group has nothing to do with the individual managed funds I invest in. If the majority of funds under perform their indexes, why not ignore the majority and pick from the minority?

Articles like this do not bother me anymore because I have come to view them as investing advice for non-investors. If I had the choice of buying 10 random managed funds vs 10 random index funds, I would go with index funds too.

For people who do not know anything about mutual fund investing, starting with index funds is not bad advice.

Whether people who do not know much about mutual funds should be investing in them at all is another topic.

Now I'm no expert. But I have learned a bit about how mutual funds work. And online screening tools make it pretty easy to sort out funds with low fees that have performed well over the long term, if you know what to look for.

So my original experiment was to see if a portfolio of 20 funds, that could be bought through a single brokerage for $50,000, would beat a portfolio of 20 Vanguard funds, a portfolio of 20 ETFs, a portfolio of 3 index funds representing the same Domestic, International equity and Bond mix as the 20 fund portfolios and a portfolio made up solely of the S&P 500.

At exactly 6 months, I took a detailed snapshot of the performance of each portfolio and will spend the next few posts sharing the details.

The 20 funds I picked are not all managed funds. In some cases, Etrade did not offer a managed fund in a particular category that I liked. The 20 Vanguard funds are not all index funds as Vanguard did not have index offerings for all the categories I chose. I should also mention that Vanguard has higher minimums for many of its funds so you could not have bought all 20 for $50,000. Also, there are some redundancies in the Vanguard 20 that are intentional. For example, the Large Cap Blend fund is a 50/50 mix of the Large cap Growth and Large Cap Value funds. So instead of $2500 in all three, I could have invested $3750 in just the Value and Growth categories and gotten the same coverage, initially. This has bugged some people but as I share the 6 month details, it will be clear why I did this. (to compare how $2500 did in each category in dollar terms).

In both 6 month performance and year to date performance the WylieMoney picks were better as a group. Since I have not been re-investing dividends and capital gains prior to May 1st, the year to date number is not 100% accurate. And 3 year performance or older would be nice to see, but all the portfolios have funds that have not been around for that long so the results won't be complete.

So to sum up, the most expensive portfolio (see chart below), the WylieMoney 20 Mostly Managed portfolio returned 8.81% compared to the 3 Index Fund portfolio which returned 7.58%, the 20 Vanguard Fund Lazy portfolio which only earned 6.92% and the 20 ETF portfolio which earned only a little more than a good online savings account at 5.63%. The SPY portfolio, representing the S&P 500 was up 4.44% just over half as much as the WylieMoney 20.

I am amused to note that my hypothetical portfolio has also beaten my actual brokerage and retirement accounts. I take some comfort in noting that my actual accounts beat all the index and lazy portfolios as well!

Below are snapshots of each portfolio. Click for a larger image:

WylieMoney 20 Mostly Managed

My Brokerage

My Roth

Three Fund Index

Lazy 20 Mostly Index

WylieMoney Slowly

20 ETFs

S&P 500


November Pick is Baron Partners (BPTRX)

My original Mid Cap Growth pick for the WylieMoney Portfolio was Janus Enterprise (JAENX). One of the main reasons I choose JAENX was its low expenses. It still has the lowest expenses of the funds Etrade offers in this category, but Janus Orion (JORNX) has almost the same expense ratio and has walloped JAENX:

I'm not choosing Janus Orion either. I actually own Janus Orion and am glad I do, but this portfolio, already has too much Janus in it and I need to diversify.

Why diversify across mutual fund companies?

Each fund company has a culture, analysts that share ideas, managers that learn form each other. Janus in the late 90s showed how funds across categories could use similar strategies to make a killing. Then in the early years of this decade, Janus demonstrated how funds across categories could get killed by following similar strategies. Plus, when a fund company is in transition, it can impact all the employees for better or worse. If all your funds are with one company and things at the company change for the worse, much sadness will follow.

We at WylieMoney seek to avoid "much sadness" even if it means avoiding a little extra joy, from time to time.

Another reason I am picking Baron Partners over Janus Orion is that I want a fund that is really a Mid Cap Growth fund.

JORNX only has 43.86% of it assets invested in Mid Cap companies:

BPTRX has 78.39% invested in Mid Caps.

BPTRX does have higher gross expenses than I like at 1.77%, but currently there is a fee waiver so the actual expenses are 1.32%. Baron's portfolio turnover is 36% compared with Orion's 63% so the tax hit on this fund should be lower, which is important as well. Turnover is how often a fund manager buys and sells new stocks. 100% turnover means the manager sold 100% of the stocks in the fund and bought all new ones in one year which can generate capital gains if stocks are on the rise, and also incur greater expenses as it costs money to trade stocks.

So on the next day in November that 'the markets' take a dive, I'll add $2500 to BPTRX in the hypothetical WylieMoney Slowly portfolio.


Portfolio Update 11/02/07 My Roth IRA Takes a Tumble!

Another big drop in equity markets this week shuffled up the portfolios in my experiment. My Roth IRA in particular took a big hit due to relatively large Real Estate exposure in Boston Properties (BXP) and investments in the financial sector through iShares Dow Jones Select Dividend Index (DVY) both of which were down almost 4% for the week. Last week, My Roth was in third place since May. This week it falls to fifth. It is still the third best performing portfolio Year to Date.

I've gotten feedback recently that my charts/graphics are not as clear as they could be and that they cause certain viewers mental anguish and such.

I tried to clean this up a bit- I made the lines thicker and moved the $ to the left. What this chart illustrates most clearly to me is that from May to mid September, the portfolios tracked each other relatively closely. But recently the portfolios have diverged significantly.

The following screenshots are only intended for the curious and for those who might suspect me of manipulating my results. I re-invest all capital gains and dividend distributions. Click the image for a larger view.

WylieMoney 20 Mostly Managed

Three Fund Lazy Portfolio

WylieMoney Slowly

Lazy 20 Mostly Index

ETF 20

S&P 500