Low turnover ratios in Kothari Pioneer funds

Aabhas Pandya

Believers of the theory that lofty returns are achieved with active buy and sell strategy could be in for a surprise with the revelation of turnover ratios in Kothari Pioneer's equity funds - one of the most active mutual fund houses in the country is not very active, when it comes to juggling its equity portfolio. All the equity funds of Kothari Pioneer have a low turnover ratio, which means that the fund managers largely follow a buy and hold strategy.

Simply put, portfolio turnover is a measure of how actively a fund manager trades the portfolio of your fund. Expressed in percentage, the inverse of a fund's turnover ratio is the average holding period for a security in that fund. If a fund has a 20 per cent turnover ratio, it would suggest that - on average - the fund will hold a security for five years before selling it. A fund with a 200 per cent turnover ratio will change its portfolio in six months or in other words, replace the entire holdings in its portfolio with new stocks in six months.

The turnover ratio is calculated by taking the lesser of the annual purchases or sales (excluding cash) and dividing it by the average net assets of the fund. For instance, a fund has purchased stocks worth Rs 500 million and sold Rs 1000 million during a given year. The turnover ratio is arrived at by dividing the lesser of the two (in this case, purchases) by the total average assets of the fund (say Rs 2000 million), which is 25 per cent.

As has been said, Kothari Pioneer's equity funds are conservative with their investments and do not rapidly change their portfolio. For instance, the pharma fund from Kothari Pioneer has a turnover of only 12.5 per cent. This means that the fund will hold on a stock for 8 years, on an average! Launched in early 1999, KP Pharma has maintained a very stable portfolio, with very marginal shuffling of the stocks at the top.

The low portfolio turnover of Kothari Pioneer Infotech Fund comes as a surprise and explodes the myth that infotech funds have to be aggressively churned to generate returns. The turnover is only 21.48 per cent, which means that a stock has an average life of 4.65 years in the portfolio. Launched in 1998 when the software stocks were yet to catch the fancy of the market, the fund has benefited by holding on its investments, bought at fairly low prices, rather than actively trading its portfolio. The low portfolio turnover in KP Infotech could also be partly attributed to steady inflows into the fund and a spurt in net asset value (NAV), which boosted the assets under management. Even as the fund manager continued to trade at the same pace, the turnover ratio would have declined as assets rose.

Kothari's Prima Fund has the highest turnover ratio of 50.69 per cent. This is not surprising, since the fund invests in small and mid-cap stocks, which are more volatile than large cap holdings and hence, offer a number of trading opportunities. Among other funds with relatively high portfolio turnover, KP Bluechip, KP Taxshield and KP Internet Opportunities, each has a turnover ratio of 34.03 per cent.

Fund managers who do extensive research on their holdings, for example, usually have lower turnover rates than those who rely on factors such as price momentum. Value-oriented funds, for the most part, have a lower turnover than growth-oriented funds. Index funds have extremely low turnover ratios and understandably so, since they are not actively managed but merely replicate the stated benchmark. Further, these funds buy and sell only in the event of fresh inflows or redemption and when there are changes in the composition of the index.

A LOW TURNOVER STORY

Fund	Turnover ratio (%)
KP Pharma	12.50
KP FMCG	16.75
KP Infotech	21.48
KP Prima Plus	30.05
KP Internet Opportunities	34.03
KP Bluechip	34.03
KP Taxshield	34.03
KP Balanced	34.97
KP Prima	50.69

Source: Value Research

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