Portfolio Turnover and Spread

All pooled investments buy and sell some portion of their holdings every year. This costs dealing fees and ‘spread’ (the difference between the buy and sell prices of individual shares).

The rate at which they do so is called the 'turnover' of their portfolio. ‘Turnover’ means:-

• If every share is sold and replaced on average every year the turnover is 100%.

• If every share is sold and replaced on average every two years the turnover is 50%.

• If every share is sold and replaced on average every six months the turnover is 200%.

A government-sponsored report several years ago calculated that it costs an institutional investor 1.7% to sell one share and buy another. It ought to be cheaper now - let us say 1%.

The average turnover across all UK funds is believed to be about 50%. So the average fund pays half of 1% (0.5%) in dealing fees. Funds may have turnovers as high as 300%.

When stockbrokers over-trade a private client's discretionary portfolio to generate brokerage income it is called "churning". This scam is rightly illegal.

Funds may give their business to brokers within the same corporate group at undisclosed rates and/or in return for soft commissions.

Performance Fees

Performance fees are based on an illusion. Avoid funds that pay them. Find out why in Deeper.