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Mutual Funds That Take the Slow-Trade Route to Excelling


NEW YORK ( TheStreet ) -- Most actively managed mutual funds trade constantly as portfolio managers seek to grab the latest bargains. But Mairs & Power Growth (MPGFX) moves at a slower pace, rarely buying and selling.

The actively managed fund only turns over about 2% of its portfolio annually. In contrast, the average large-blend fund turns over 62% of the portfolio. Does the slow-trading approach provide an advantage? Yes, according to two recent studies. During the past five years, low-turnover mutual funds outdid competitors that traded rapidly.

A study by Janus Capital Group (JNS) examined mid-cap growth funds, comparing slow traders with an average turnover rate of 12% and fast movers with a 92% rate. During the five years ending in June 2013, the slow traders returned 8% annually, while the rapid traders lagged by two percentage points.

In a separate study, the No-Load Fund Investor newsletter found that large-blend funds with below-average turnovers returned half a percentage point more than high-turnover peers. The newsletter also concluded that low-turnover funds had less risk and excelled in the downturn of 2008.

Researchers have long believed that high-turnover strategies can be costly to execute. Every time they buy or sell, investors face brokerage commissions and other transaction costs. But in the past it was difficult to determine how much of an edge low-turnover funds enjoyed. During the 1990s, some researchers concluded that low-turnover funds produced about the same results as rapid traders.

It is not clear why the latest studies showed that in recent years low-turnover approaches enjoyed an edge. Perhaps increasing trading volumes have taken a toll on high-turnover funds. As the financial crisis unfolded in 2008, trading volume spiked as many portfolio managers sought to limit losses by selling shaky stocks and shifting to safer holdings. Trading volume surged again in 2011 as markets sank in reaction to concerns about the European crisis. It could be that the costs of the increased trading eroded returns.

To limit trading costs, consider funds with low-turnover strategies. Strong-performing choices include Al Frank (VALUX), Loomis Sayles Growth (LGRRX) and Mairs & Power Growth.

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