Pension Fund Portfolio Turnover and Performance Evaluation
Nov 1, 1993 ,
32 pages
Summary
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.