The U.K.'s Investment Association proposed a new method of calculating portfolio churn, among other ways of identifying and managing investment management costs.
The association — which represents the £5 trillion ($7.6 trillion) U.K. money management industry — presented its new methodology for calculating portfolio turnover rate, how much buying and selling of stocks and securities is taking place.
The new methodology is based on a modification of the Securities and Exchange Commission approach, said a discussion paper the association released Tuesday. While the calculation of a portfolio turnover rate is widely used in Europe and the U.S., it requires explanation to investors, the association said.
Among other issues, the Investment Association identified difficulties in the European version that make it “impossible to identify with certainty whether trading activity relates solely to flow or is the result of discretionary decisions.” It can also lead to distortions to the reality of what is traded.
The SEC version, it said, “is unable to cope with circumstances where substantially all trading activity results from net flows and the pricing mechanism provides protection from dilution,” which it said will typically be the case for passive investment replicating an index.
The modified version presented by the Investment Association, takes into account the net inflows or outflows over a year, but does not take full account of inflows and outflows.
Under the proposal, investors would be informed as to whether the portfolio churn for an investment fund is high, medium or low for that fund, relative to other, similar investment funds. They would also be told how this relates to transaction costs.
The paper has been produced for discussion with regulators, government, the industry and investors, the Investment Association said in a statement accompanying the paper.
Spokesmen at the Investment Association were not available to comment by press time.
