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    Seed Weekly - A low turnover investment strategy

    A low turnover investment strategy has a lot of attraction, not least of which is lower brokerage fees. Many fund managers, however, adopt an approach that sees them buy into a company only to sell out again in one quarter. Higher and higher turnover is more and more typical of fund management today, but we ask: “Does a lower turnover strategy have merit?”

    Warren Buffett, who is arguably the best investor the world has seen, makes the comment “Our favourite holding period is forever”. He, together with his partner Charlie Munger, have been managing the assets of listed Berkshire Hathaway since 1965.

    His success has largely come about because he thinks about investments in multi decades, and not in monthly or quarterly terms. He first bought into American Express in 1964, Coca Cola in 1988 and Wells Fargo in 1989. An investment into Berkshire Hathaway stock from 1965 to end of 2015 returned 20.8% per annum versus the S&P500 compounded average of 9.7%.

    Another investment model that requires only an annual rebalance of the portfolio is known as the “Dogs of the Dow”. The Dow Jones Industrial Average index comprises 30 of the largest companies in the US. This index itself changes infrequently. The portfolio theory selects the 10 shares out of the 30 that have the highest dividend yield and holds these for one year, rebalancing annually.

    Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. Performance has not always beaten the Dow or S&P500 indices, but it is a proven methodology.

    Over the 10 year to 2015 the Dogs of the Dow portfolio returned 10.6%, and since 2000 the portfolio returned 7.9% per annum. Over these periods it outperformed the Dow index itself, which has returned 9.1% and 6.3% per annum.

    A fund manager that we follow and invest into adopts a strategy of trying to buy shares in good companies, not to overpay and then do nothing – i.e. have an ideal holdings period of “indefinite”. The fund performance over 5 ½ years has been 16.3% against the MSCI All Country World Index of 7.7% per annum.

    Finally there is one investment fund that has truly demonstrated the benefits of long holding periods. One of the longest running funds with almost zero turnover is the Voya Corporate Leaders Trust Fund. The trust fund goes back to its original founding in 1935 with the original founders buying an equal number of shares in the New York Exchange top 30 shares by dividend. The Trust's founders believed companies that could prosper in the Great Depression would succeed in all economic and market conditions.

    The decree was that holdings could not be sold, unless in exceptional circumstance, such as bankruptcy, spin offs, etc. Therefore, only in certain rare circumstances can a share be sold and none added, unless directly tied to one of the original. For this reason, turnover is essentially at 0% and the fund is managed on an “autopilot basis” The fund is not necessarily diversified across sectors because of its original construction. It therefore has an overweight position in energy, basic materials and industrial companies, and is underweight in technology and healthcare.

    The 30 holdings are now down to 22 shares. Over time there have been name changes, mergers, etc, but no active management of the original shares. Current holdings also now include Warren Buffett’s Berkshire Hathaway, because this company issued shares when it bought railroad company Burlington Northern Santa Fe in 2010. The original 1935 holding was Atchison, Topeka and Santa Fe Railway, which merged with Burlington Northern Railroad and Santa Fe Railway in 1996.

    The performance over the last 40 years has been ahead of the S&P500 and the Dow Jones. Over the last 10 year to the end of June, it has returned 7.99% against the 7.42% of the S&P500 index.

    One of the metrics that we look at when allocating money to a fund manager is their turnover. We are not necessarily against higher turnover in a fund if value can be added, but generally speaking higher turnover reflects lower levels of conviction, and is not necessarily ideal.


    Ian de Lange

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

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    Permalink2016-10-12, 10:17:26, by Mike Email , Leave a comment
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