EBRI Issue Brief

Pension Fund Portfolio Turnover and Performance Evaluation

Nov 1, 1993 32  pages


  • This Issue Brief examines pension fund portfolio turnover and performance evaluation. It provides background on investment asset turnover, analyzes the implications of active and passive management strategies, and describes the criteria by which pension plan sponsors evaluate investment managers. In addition, the discussion presents the findings of two EBRI surveys designed to estimate the turnover activity at both the plan sponsor and investment manager levels.
  • There are two distinct measures that may be adopted in analyzing pension plans' short-term trading behavior. Ideally, one would have information on average holding periods by major categories of assets. However, currently there are no compelling reasons for a plan sponsor or investment manager to produce these figures for a tax-exempt trust. The alternative measure that is more widely available is the portfolio turnover rate, which is calculated as some measure of purchases or sales of assets divided by average assets held for the period.
  • Estimated average holding periods for Frank Russell Company clients portfolios suggest that more than 80 percent of the domestic equity assets had holding periods in excess of six months.
  • Evidence from EBRI questionnaires suggests that equity turnover reported on a plan-wide basis averaged 50.38 percent for U.S. common stock in 1990 (59 percent of the average in 1986) and that equity turnover reported by individual managers averaged 40.26 percent for U.S. common stock in 1990 (85 percent of the average in 1986).
  • Both plan sponsors and investment managers agree that a rather long time horizon is used to evaluate investment performance before a manager is terminated. Investment managers' investment styles also appear to have lengthy time horizons.
  • Plan sponsors and equity investment managers are largely in agreement on how managers are being evaluated. It is apparent that short-term performance is not a high priority in that evaluation.
  • Equity investment managers have an average tenure with the sample plans of more than five years and experience low turnover. The managers appear to have sufficient time to prove their style without having to resort to short-term tactics for quick stock price appreciation.