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Funds With Lower Than Average Turnover Outperform

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Oct. 20, 2003 — Funds with a lower than average turnover outperformed their higher turnover peers in all nine domestic equity fund styles on a three and five-year annualized basis, according to a Standard & Poor’s study. Over a one-year period, the study found that only five of the nine domestic equity fund styles saw the same results hold true.

The study examined 15,000 domestic mutual funds to determine the average turnover for each of its nine domestic fund styles. It then sorted the funds in each of the styles into two groups — those with a turnover below the average of their peers and those with a turnover that was higher. By comparing the average annualized return for each of the two groups over a one, three, and five-year performance period, the study determined that for funds with a larger than average turnover, a higher return was not necessarily something investors wound up with.

“During the recently concluded bear market, it was clear that funds with a lower than average turnover outperformed those with a higher turnover,” adds Phil Edwards, managing director of funds research at Standard & Poor’s. “Buy and hold strategies prevailed over the long-term, and investors were rewarded for their patience. This consistently worked even over the last five-year period.”

“The same results did not necessarily hold true over the short term,” continues Edwards. “In the recent market recovery, which just celebrated its first year anniversary, only five of the nine fund styles with a lower than average turnover saw greater results. While the pattern is not quite as evident as it is over the long-term, it does make clear that trends do not last forever.”

Fund StyleOne-Year Return Through 9/30/03 (%)Three-Year Return Through 9/30/03 (%)Five-Year Return Through 9/30/03 (%)Average Turnover (%) Average Large-Cap

  • Growth Fund+22.16-17.85-1.02110.13
  • Funds Below Average Turnover+22.19-17.05-0.9854.55
  • Fund Above Average Turnover+22.12-19.34-1.10217.24
  • Average Large-Cap Blend Fund+21.40-10.49+0.4781.09
  • Funds Below Average Turnover+21.74-10.37+0.5132.03
  • Fund Above Average Turnover+20.59-10.79+0.38201.36
  • Average Large-Cap Value Fund+22.37-3.59+3.0265.62
  • Funds Below Average Turnover+22.68-3.04+3.2935.67
  • Fund Above Average Turnover+21.86-4.40+2.64116.81
  • Average Mid-Cap Growth Fund+27.39-17.57+4.92164.69
  • Funds Below Average Turnover+26.85-15.72+5.0876.36
  • Fund Above Average Turnover+28.16-20.41+4.64294.77
  • Average Mid-Cap Blend Fund+29.29-2.25+10.15119.07
  • Funds Below Average Turnover+26.87-1.06+10.5243.63
  • Fund Above Average Turnover+38.01-6.78+8.94393.18
  • Average Mid-Cap Value Fund+25.89+5.28+9.9778.95
  • Funds Below Average Turnover+27.20+6.45+10.9842.92
  • Fund Above Average Turnover+23.58+2.72+8.04147.60
  • Average Small-Cap Growth Fund+34.43-12.79+7.37136.75
  • Funds Below Average Turnover+34.64-11.30+7.7378.78
  • Fund Above Average Turnover+33.98-16.02+6.59265.31
  • Average Small-Cap Blend Fund+31.02+1.31+9.62106.36
  • Funds Below Average Turnover+29.89+1.73+9.7844.25
  • Fund Above Average Turnover+33.26+0.61+9.30238.23
  • Average Small-Cap Value Fund+29.61+8.96+11.7970.66
  • Funds Below Average Turnover+29.38+9.38+12.1934.07
  • Funds Below Average Turnover+29.97+8.28+11.08131.48

Source: Standard & Poor’s. Total returns are in U.S. dollars and include reinvested dividends. Data as of 9/30/03.


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