The Relation Between Portfolio Turnover and Mutual Fund Performance: Evidence from Thailand

Abstract

This paper examines whether the active management strategy can outperform the market by using turnover ratio as the proxy. Turnover ratio is the percentage of changing fund’s holding in a given year. Therefore, a high turnover ratio can indicate an active management.

This paper will focus on an active equity fund in Thailand from 2010 to 2019. The first objective is to examine the effect of the different levels of turnover ratio on fund performance. This objective sorts mutual funds based on their turnover ratio. The findings are the performance of the high-turnover funds are indifferent from the low-turnover funds and the moderate-turnover funds significantly underperform the market and in the aggregate, active funds underperform the market in the net return basis which supports the Efficient Market Hypothesis that investors have the same information. Thus, the buy-and-hold strategy is preferred in Thai mutual fund industry. The second is to examine the subsequent performance by using the past turnover ratio and past performance as an investment strategy. The result suggests that there is no strategy that significantly beat the market. At the same levels of the past performance, investing in the past high-turnover ratio is indifferent from investing in the past low-turnover ratio. While investing in fund with moderate turnover ratio in the past without considering its past performance will significantly lead to adverse return in the subsequent year. The third objective is to investigate the relationship between portfolio turnover and mutual fund performance by employing panel regression, panel vector autoregression, and panel granger causality. These three approaches affirm that there is no relation between turnover and mutual fund performance. Additionally, the result of impulse response function (IRF) and forecast-error variance decomposition (VDC) indicates that the variability of trading activities is explained by the shocks of performance. In contrast, shocks to trading activities do not tend to have an impact on corresponding performance.