Which Fund Companies Are Really Thinking Long Term?

As hedge funds have grown rapidly in recent years, mutual fund managers have been telling us that short-term trades have become less profitable. However, they say all that trading by hedge funds has created more opportunities for the long term. So, they say investors with long time horizons should do quite well.

This made me curious to see just how far out typical fund managers at the largest mutual fund companies are looking. To do that I looked at the asset-weighted turnover average for domestic-stock funds in our nine Morningstar Style Box categories. Turnover of 100% means holding a stock for one year on average, while turnover of 20% means five years.

To be fair, turnover isn't entirely in a manager's control. Redemptions can drive turnover up, and mergers can take holdings out of a portfolio. Changes in market volatility can impact turnover, too.

Looking at turnover rates for the 20-largest fund companies, it struck me how great the differences are among fund shops. Even when they incorporate different styles and strategies, you'll often find a strong underlying philosophy about how often one should trade.

Consider the large-value funds from a few different companies. Typically, large-value funds run at fairly modest turnover, but American Century, which leans heavily on quantitative trading strategies, has two funds with turnover of more than 100% and two below 30%. By contrast, American Funds has four large-value funds all with turnover below 25%, and T. Rowe Price has two large-value funds and both have turnover below 25%.

So, let's take a look at the 20-largest fund companies broken up by implied time horizon.

Fund Firms Ranked by  Weighted Turnover
Family	Avg Turnover
Davis Funds	6.71
Dodge & Cox	12.00
American Funds	19.08
Dimensional Investment Group	19.34
Vanguard	19.99
Franklin Templeton Investments	25.82
T. Rowe Price	27.12
Legg Mason Partners	34.58
Columbia	35.86
JP Morgan	47.56
Lord Abbett	49.05
Van Kampen	50.18
Aim Investments	53.62
Fidelity Investments	58.62
Janus	59.89
MFS	66.39
Hartford Mutual Funds	74.38
Putnam	74.60
OppenheimerFunds	80.37
American Century Investments	93.49
Data through September 2006

More than Five Years
Davis/Selected has an average turnover of about 7%. Davis is a long-term value investor, but the firm is in blend because it places heavy emphasis on finding the best management and waiting for a sell-off to get in at a decent price. You can also see its patience when something bad happens at a holding. Rather than window-dress its portfolios to get rid of the embarrassing pick, it will wait if the managers think the stock will rebound because the market overreacted.

Dodge & Cox checks in with turnover of just 12%. Everything about these guys says long term. The firm has been around since 1930, and it hasn't changed much over that time. The managers do solid fundamental research to unearth attractive values.

American Funds also has low turnover (19%). American's managers use a variety of strategies, but underlying them all are fundamentally focused managers who invest for the long term.

Dimensional (aka DFA) also has a time horizon of more than five years. That's no surprise as it runs quasi-index funds geared toward keeping trading costs and expenses as low as possible.

Vanguard clocks in just a hair below five years. Besides index funds, the firm seems to prefer low-turnover subadvisors. However, Vanguard does have a handful of growth managers with turnover of more than 80%, so it's clearly not a hard-and-fast rule.

More than Three Years
Franklin-Templeton clocks in at 26% turnover. Even some of Franklin's growth funds have low turnover, with the notable exception of  Franklin Aggressive Growth (FGRAX), which has huge turnover of 180%.

T. Rowe Price has 27% turnover. More than most firms, T. Rowe's funds are quite similar across the board. You see low turnover and broad diversification in just about every fund save a few narrowly focused regional or sector funds.

More Than Two Years
Legg Mason Partners (formerly Smith Barney) and Columbia have turnover in the 30s in part because they have uncommonly patient growth funds. Columbia's Acorn funds have turnover below 20%--they look for steady growers that they can hold for the long term rather than superfast growers whose prospects can turn on a dime. Likewise, it boasts  Legg Mason Partners Aggressive Growth (SHRAX), run by one of our favorite managers, Richie Freeman. Freeman runs turnover of just 2%. He looks for companies with a sustainable edge and then holds on just about forever.

JP Morgan and Lord Abbett make it just under the wire with turnover in the upper 40s.

More than One Year
It's interesting to see AIM down here with turnover of just more than 50%. Historically, AIM has been a fairly high turnover momentum shop, but it has become more fundamentally driven in recent years and turnover is fairly moderate.

Fidelity is also an interesting case in point. It has invested enormous sums in trading technology, and managers are free to trade as much as they want. So, you have managers like Fergus Shiel and Jason Weiner turning over their portfolio at more than 100% a year working alongside some managers of giant funds who have had to tone down their turnover due to asset size, such as Will Danoff, who has 60% turnover at Contrafund. This is, after all, the shop of Peter Lynch, who held hundreds of names and had triple-digit turnover. You also have a few low-trading managers who have had low turnover all along, such as Stephen Peterson and Rich Fentin. At Fidelity, the mantra is "whatever works."

I'll skip ahead to the shop with the highest turnover--American Century. American Century is very much a trading shop. It has gone to great lengths to make trading as cheap as possible, and it has strategies that are very much about making smart short-term trades. Every year it comes out with new funds designed to take advantage of its cutting-edge research. One such fund is American Century New Opportunities II , which runs turnover of 260%. Sometimes they work out, but that turnover certainly makes for a high hurdle rate when you consider the costs. It also means taking on hedge funds directly.