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IMA refutes myths about equity turnover in follow-up submission to Kay review

28 November 2011

In a follow-up submission to the Kay Review, the Investment Management Association (IMA) has provided evidence to refute the myth that fund managers are guilty of excessively short holding periods.

The research explains that market level turnover is an unhelpful indication of market activity amongst investment managers. Market turnover is dominated by the activity of ultra-short term participants, hedge funds and others. Traditional long-only investment managers are responsible for just 25% of daily trading volumes. For this reason it is more appropriate to look at portfolio level data.

The IMA research focused on actual fund portfolios1 to calculate how long companies had been held and what proportion this reflected in terms of the portfolio's total UK equity holdings.

The key findings for the funds examined showed the percentage of companies held for one to five years and what percentage of the portfolio's UK equity holdings this represented:

% of companies held for:

% of UK equity holdings within portfolio held for:

At least one year

71

86

At least two years

49

71

At least three years

36

60

At least four years

28

52

At least five years

19

42

Commenting, Jonathan Lipkin, Head of Research at the IMA, said:

“There has been a tendency to jump to conclusions about investment manager short-termism using data that, in reality, does not really tell you about the decisions managers are actually making. Overall market turnover measures reflect the behaviour of a wide variety of market participants, while portfolio turnover rates provide a crude measure of overall activity.

The IMA's initial analysis of a number of UK equity funds' continuous holdings of companies finds little to support the notion of endemic short-termism. On the contrary, 42% of holdings by value have been held for at least five years. The overall picture which emerges is that the accusation of constant churn is misleading.”

Notes:

Read Understanding Equity Turnover Data: Initial Findings from IMA Research

http://www.investmentfunds.org.uk/assets/files/consultations/2011/20111128_IMATurnoverResearch-InitialFindings.pdf



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