Portfolio turnover can be a hidden cost for any fund. If a manager tends to buy and sell securities frequently, those trading costs and capital gains distributions fall to investors. They’re not included in a fund’s expense ratio, so investors may bear those expenses without knowing. High-portfolio turnover strategies aren’t all bad; in fact, many momentum-focused funds bake that into their approach. However, it’s important for investors to determine the level of turnover with which they’re comfortable. Here are four equity funds worth watching.
BNY Mellon Dynamic Value DAGVX
Lead manager Brian Ferguson searches for U.S. large-cap stocks that have attractive valuations, strong fundamentals, and catalysts for business improvement. Ferguson’s two-year investment horizon is shorter than most value managers’, so it has generated higher portfolio turnover. As of August 2022, the strategy’s annual turnover was 115%, nearly double its typical large-value Morningstar Category peer’s 58%. Ferguson’s benchmark-agnostic approach drives the turnover, in part. For example, the fund overweighted financial-services stocks by 8 percentage points versus its Russell 1000 Value prospectus benchmark as of March 2023, driven mostly by insurance companies. Ferguson believes some life insurers, like Ameriprise Financial AMP and Voya Financial VOYA, have catalysts that can transform them into more diversified financial companies.
Alger Capital Appreciation ACAAX
Comanagers Patrick Kelly and Ankur Crawford favor emerging and established growth stocks. This allows Kelly and Crawford to invest across the growth spectrum, but that has proved challenging. In January 2023, the strategy’s Process Pillar fell to Average from Above Average, dropping the Morningstar Medalist Rating for its more expensive share classes to Neutral from Bronze. (Its cheaper vehicles remain at Bronze.) Excessive trading and weak execution in recent years drove the downgrade. The strategy’s 108% annual portfolio turnover as of October 2022 came amid a challenging period of growth stocks, where the comanagers moved from emerging to more established names to limit losses from rising rates. Kelly and Crawford could have better executed the shift as they bought and sold multiple losing stocks over 2022.
Victory RS Small Cap Growth RSEGX
Lead manager Scott Tracy looks for U.S. small-cap stocks with durable earnings growth, high returns on capital, and low debt. To find those names, Tracy and his team filter their 1,000-stock universe to 500 names using inputs like growth durability and balance sheet metrics. The team also employs technical indicators like unusual trading activity, which flags downward-trending names. Selling those losers, including not holding winners for very long, contributes to turnover that regularly approaches 100%. As of December 2022, the annual figure was 105%. Some of that turnover came from the team slashing its biotechnology holdings; it had 13 as of December 2022 but 22 just 18 months prior.
Vanguard Global Equity VHGEX
This multimanager approach to global large-cap stocks typically has moderate portfolio turnover. Over the past 10 years, its annual turnover averaged 47%, just above the typical global large-stock blend category peer’s 37%. However, as of September 2022, the strategy’s annual turnover was 84%, triple the previous year’s number. Vanguard’s major subadvisor shakeup in August 2022 explains some of this increase. It removed Marathon and split its 50% stake evenly between new subadvisors Pzena and Wellington. Baillie Gifford continues to manage the other 50%. Marathon’s multiple-sleeve approach created a portfolio with many holdings; removing those names and adding Pzena’s and Wellington’s may keep portfolio turnover high for a while.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.