|
Published by: Lyon Capital Management, LLC - A Registered Investment
Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
Portfolio Turnover
By Douglass C. Lyon, CFA
Portfolio turnover is a
valuable tool to analyze the investment style of a portfolio manager. It also has value as
a comparative measure. The information provided is: the higher the turnover rate, the
higher the level of trading (that is selling and presumably buying) that is done in the
account.
What is Portfolio Turnover Exactly?
Portfolio turnover is the frequency that
the holdings of a portfolio change. Mathematically portfolio turnover is the total dollar
value of assets sold in one year divided by the average total asset value for that year.
If the total asset value of your portfolio averaged $1 million and the total value of
assets sold during the year equals $200,000 then the portfolio turnover is 20% or one
fifth. If this situation is typical of annual activity, then this portfolio is said to
turn over once every five years.
Portfolio turnover rates vary from manager
to manager and from portfolio to portfolio. The calculation of the rate assumes that this
same level of activity will take place year-in and year-out. Large cash flows relative to
the size of the portfolio will likely skew the calculated rate. Generally speaking a
portfolio turnover rate of once every two years, or more than 50% , indicates the manager
is an active trader. A rate of turnover once every 10 years (or 10%) indicates a pretty
strict buy and hold approach with little or no selling.
Why should an investor care about
turnover?
As the turnover rate approaches and exceeds
100% the manager is becoming more of a speculator than an investor. Naturally, most of the
large Wall Street firms (Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney,
etc.), also known as sell-side firms, advocate, through their stocks-of-the-day programs
and weekly market strategy statements, a high level of trading. In many departments of
these firms workers are compensated based on how much product they sell, not on the
investment performance of their client accounts. From an investor’s perspective the
incentive is not in the right place.
John Bogle, founder of the Vanguard mutual
fund family and father of the index fund, and Warren Buffett, likely the most successful
investor of the 20th century, both speak out against high turnover in
investment portfolios as an activity that serves only to reduce the returns assets can
generate. Mr. Buffett places patience high on his list of qualities that make an investor
successful. He is noted for saying that he only buys stocks that he would be satisfied
holding if he knew that the stock market was going to be closed for the next ten years.
Buffett, in commenting on his general lack of trading, says that he often makes more money
when he is snoozing than when he is active.
Turnover Trivia
What is the average mutual fund turnover
rate?
A. 20% B. 50% C. 75% D. 110%
(the correct answer is D)
What is Lyon Capital Management’s
approximate turnover rate?
A. 10% B. 20% C. 50% D. 70%
(the correct answer is A)
Our philosophy is one of long-term
investing. The shorter an investor’s time horizon, the more subject they are to the
market’s whims and fancies. The more long-term the investor’s horizon, the more
the investment is influenced by business and economic fundamentals. The later is much
easier to predict than the former.
So...if you want to be an investor instead
of a speculator, examine your portfolio’s turnover rate. If you don’t want to do
the math, ask a Registered Investment Advisor like Lyon Capital Management to do this for
you. If you own a mutual fund go to www.morningstar.com and look it up. If you are in the
50% to 100% range, you may want to re-evaluate. We are, of course, happy to help.$$
Enron!
By Douglass C. Lyon, CFA
As the various news
media have a field day covering the goings-on at Enron and Arthur Andersen from every
conceivable angle, the markets barely budged. In fact the Dow Jones Industrial Average is
higher today than it was when Enron declared chapter 11.
I believe the whole Enron affair, along
with Global Crossing and similar ugly situations, will end up making the U.S. markets
stronger. Auditing procedures will be tightened. Company financial documents published by
public companies like annual reports, and 10Qs will contain more information dealing with
company activities. Analysts will likely be more careful examining company financials and
business practices (at least temporarily). And accountants and bankers will likely be more
sensitive to conflicts of interest in their business affairs. These are just a few of the
positives that will come out of the Enron situation.
In general the quality of information
provided to investors will improve. The transparency of what actually is going on inside
various corporations will improve. All of this will serve to make markets more resilient
to future Enrons and more efficient...a plus for investors. $$
The Lessons of the 21st Century Markets
By Kate Lyon
We are often asked,
after downturns in the market, “So, how is your business doing?” We have been
fortunate to be able to reply, “Very well, thank you.” While many investors are
wringing their hands over portfolio decreases of 25% to 100%, we are happy to report that
Lyon Capital Management clients have earned and continue to earn positive strong returns.
During the go-go days of the internet
bubble some were skeptical of the value investing style and were not happy when returns
lagged the (overvalued) S&P 500. We continued to plod along with our sometimes
unglamorous investing style. We stayed focused and disciplined. Our clients were rewarded
for their patience
Looking back there are a few lessons
investors can learn from times and events like we have seen in the last few years. They
are:
 |
Invest in leading companies that are undervalued. |
|
Diversify among asset classes and among industries. |
|
Keep individual portfolio holdings to under 10% of the total
portfolio. |
|
Avoid mutual funds except for smaller accounts where they make
sense for diversification. (Mutual fund managers manage for the fund, not for the
individual and their turnover rates are high—see page one.) |
|
Choose an investment style and stick to it. |
|
Hire a trained, registered professional, with industry
certifications and qualifications, that you know and trust to manage your money. |
If you are thinking about getting
professional help with your investments we hope you will consider Lyon Capital Management,
now in our 9th year of operation. Call or visit us at www.lyoncapital.com to obtain a copy
of our performance record. $$
|
