(PUB) Investing 2015

397 / 772

11 Morningstar FundInvestor September 2015
An equity fund’s turnover ratio—the percentage of
the portfolio’s holdings that have changed during
the past year—provides insight into management’s
investment approach. For instance, if a manager
replaces all the securities in a portfolio in a year, the
fund’s 100% turnover ratio suggests that the man-
ager generally has a one-year investment horizon for
holdings. Low turnover ratios imply longer-term
horizons, whereas higher ones indicate more-frequent
trading. An uncharacteristic spike in a fund’s turn-
over ratio may signal a departure from its existing pro-
cess. Let’s take a look at four equity funds whose
turnover ratios have risen in recent years and whether
or not investors should be alarmed.
The turnover ratio for Meridian Growth MERDX ,
which has a Morningstar Analyst Rating of Bronze,
shot up to 96% in 2014 after hovering between
25% and 37% the previous five calendar years. The
jump was attributable to a wholesale change in
the portfolio management team. Current managers
Chad Meade and Brian Schaub took this fund’s
helm in September 2013 and instituted an approach
that they executed with success for several years
at Janus. (They comanaged Janus Triton JATTX from
2006 to 2013.) This resulted in dramatic changes
to the portfolio, such as broadening the portfolio to
more than 75 stocks from roughly 55. The changes
even caused the fund to move to the small-growth
Morningstar Category from mid-growth. The man-
agers’ impressive track record at Janus helped
brighten the fund’s prospects.
Likewise, a manager change at Neutral-rated Fidelity
Dividend Growth FDGFX resulted in a sudden climb
in its turnover ratio (99% in 2014 compared with 63%
to 69% the previous three years). Ramona Persaud
took the reins from Fidelity veteran Larry Rakers in
January 2014 and slashed the number of holdings
to roughly 120 stocks from 400 – 500 stocks. Persaud
also increased the fund’s focus on large-cap dividend-
paying stocks, ridding the portfolio of most small-
and mid-cap holdings. The year 2014 marked the
second time in six years that the fund’s turnover ratio
spiked. It also skyrocketed to 177% in 2009, which
was Rakers’ first full year at the helm. Management
changes have muddled the fund’s identity.
Changes in management don’t explain all sudden
surges in turnover ratios, though. Longleaf Partners
International LLINX experienced more portfolio
change than usual in 2014, and two of this fund’s four
comanagers, Mason Hawkins and Staley Cates,
have been running the fund since its 1998 inception.
The fund’s 54% turnover ratio in 2014 was its
highest of the past 10 years. The managers added
nine new holdings to a portfolio of only around 20
stocks, and 14 holdings departed. They typically main-
tain a steady hand with holdings but sold a couple
of companies—Japanese builder Iida and Dutch oil-
storage firm Vopak—in the fourth quarter of 2014
that they purchased earlier that year as the stocks
were more vulnerable than they expected. In this
case, the turnover spike was a result of errors that led
management to decide some holdings were not
all they were cracked up to be. Stock-picking errors
contributed to a downgrade in the fund’s Analyst
Rating to Neutral from Bronze in July 2015.
Rising portfolio turnover doesn’t automatically
indicate a problem. The turnover ratio for Silver-rated
Aston/Fairpointe Mid Cap CHTTX topped 50% in
2014, more than twice its average during the previous
nine calendar years. Lead manager Thyra Zerhusen,
who joined the fund’s manager roster in 1999, and her
comanagers found attractive opportunities in basic-
materials and niche technology names in the first half
of 2014, taking sizable positions Owens-Corning
OC and Teradata TDC. (Both are now top-10 holdings.)
Zerhusen has a history of diving into sectors and
industries where she finds attractive opportunities.
The 2014 uptick in turnover doesn’t appear to signal a
departure from the managers’ time-tested approach. K
Contact Jeff Holt at
We’ve Spotted Some Spikes in Turnover
Red Flags | Jeff Holt
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks. Such
risks can take many forms,
including asset bloat, the
departure of a solid manager, or
a focus on an overhyped asset
class. Not every fund featured
in Red Flags is a sell, and in fact,
some are good long-term
holdings. But investors should
be prepared for a potentially
bumpier ride in the near future.