Increased stock turnover as managers seek to take profits

Managers believe increased volatility will be a key feature for portfolios this year

Fund managers are expecting to turn over greater portions of their portfolios in order to generate returns this year.

While last year’s rally created a pick-up in trading volumes, managers believe increased stock rotation will be needed to maintain performance in a year expected to remain volatile.

Co-head of Thames River Capital multi-manager unit Gary Potter says this year will be driven by buying and selling.

“While it is all very well to say you are a stockpicker and you can do that through 2010, we are seeing more turnover generally and there is an increasing need for rotation,” he says.

“I think we will see it being a feature of this year. The manager who is prepared to flip it around a bit and do it well can add value.

“Managers are having to take more profits more quickly because they do not see where the next 10% profit is coming from, and most managers expect volatility will be a feature of 2010.”

Odey Asset Management founder Crispin Odey says:

“For investors, trading rather than investing will be important in 2010. However, the relative quiescence of markets offers the chance to buy into good franchises.”

This trend is supported by a report published by Mercer and the IRRC Institute earlier this month. In their international survey of 991 long-only active equity strategies between June 2006 and June 2009, nearly two-thirds of managers had a higher turnover than expected.

The report warns this could impact investors by generating higher transaction costs, while also increasing the likelihood of managers straying from their stated investment approach.

Higher stock turnover is not confined only to equity funds; bond managers also expect to work their portfolios harder.

F&C Strategic Bond fund Fatima Luis says: “Going into this year, we will continue to have a high turnover because we will have to work hard to get a good return. Managers will have to time their entry point more carefully.”

Luis says although last year was about taking advantage of the market rally, this year’s lack of economic consensus is the driving force.

“One of the biggest issues this year is there are so many conflicting economic views.

“There are so many strategies to play out, which makes markets a lot more volatile but also more interesting as well,” she says.

In contrast, Royal London £519m European Growth fund manager Kevin Lilley says the uncertainty is a reason to make fewer changes.

“A lot of people are not doing much at all – they are sitting back. The factors driving the market are at a macro level and it is out of most managers’ comfort zones,” he says.