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Four High-Turnover Funds to Be Wary Of

Fast trading makes for a high hurdle.

Russel Kinnel, 08/20/2012

Two weeks ago, I wrote about turnover and how it's not a big concern except at the extreme ends. As you may recall, I found that turnover didn't explain returns very well, but it seemed to be a negative for funds in the highest quintile of category turnover. So, some combination of high turnover and a large asset base can be troubling. As I mentioned in the turnover article, you also want to check prior years' turnover to be sure that the most recent figure isn't an anomaly.

Here, I'll highlight a few funds that operate at those extremes. I'm interested in a fund's absolute turnover level as well as the amount of assets it shoves through its trading desk to get to that turnover figure. I found a few big funds that set pretty high hurdles for themselves. To be sure, most good fund managers factor those higher trading costs into their process and trade only when they expect superior returns between the stock they are selling and the one they are buying so that those costs will be covered. The catch is that they are fallible about that call just as they are about everything else. The cost of being wrong is higher when you start off deeper in the hole with higher trading costs.

In fact, two funds that I highlighted for being in slumps, CGM Focus CGMFX and Brandywine BRWIX, are near the top of the turnover rankings.

Putnam Voyager PVOYX | Turnover Rate 176%
Check out the June 30 portfolio for this fund and you'll see a share change next to nearly every name. Nick Thakore is a busy trader as he adjusts positions frequently based on price movements and changes in fundamentals. He looks for growth stocks that are relatively cheap, but he's actively tweaking the portfolio. Sometimes it makes him look like a magician. He put up great numbers in 2009 and 2010, but in 2011 the fund lost 17.8% as that trading worked against him. Thakore has said he expects turnover to come down, but that hasn't happened yet.

Blackrock Small Cap Growth PSGIX | Turnover Rate 141%
Small-growth stocks are among the most costly to trade because they have less liquidity than larger names. And when they're hot, everyone wants to buy; when they disappoint, everyone wants to sell. That may explain Blackrock Small Cap Growth's spotty performance. Andrew Thut looks for companies with great growth potential, and he adjusts his positions rapidly. He took over in 2008, so his record is still relatively brief. So far, though, the risk-adjusted result hasn't been great.

Fidelity Capital Appreciation FDCAX| Turnover Rate 182%
Fergus Shiel spent a few years as a hedge fund manager and it shows in this fund's turnover rate. He is a fan of trading technicals and says he doesn't worship at the altar of fundamental analysis. That's clear, but less clear is why you should bet on that. With assets at $5.9 billion, Shiel traded nearly $10 billion in stocks last year, a fairly typical one for the fund in terms of turnover.

Fidelity Blue Chip Growth FBGRX | Turnover Rate 132%
While this fund's turnover is less extreme, its $15 billion asset base makes it by far the biggest on this list. So far, Sonu Kalra has made shareholders and brokers alike happy with solid results. However, he's only been at the fund for three years, and that turnover rate makes me wonder if he can sustain his early success.

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.

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