Why low turnover?
A. Turnover, that is, buying and selling securities from the portfolio, triggers two significant sources of performance drag: Transactions costs: Brokerage commissions capture but a very small percentage of transaction costs. The full impact of transaction costs include: commissions, bid-ask spreads, market impact and other opportunity costs such as timing costs, lost trades, etc. In sum, it costs around 1% of principal to trade a large cap, highly liquid position. The costs are 4-5 times as large for small cap or illiquid positions. Since these costs are incurred with every trade, the only way to control them is by reducing the frequency of trading. Capital gains taxes: For a taxable portfolio, with every trade one stands to lose either 20% or 40% of the capital gains realized. The impact is that a manager operating with typical institutional turnover parameters has to earn 2 – 3 % more than the market in order to match the post tax return of an index portfolio. On the other hand, unr
