LONDON (Reuters) - Market volatility during the credit crisis forced fund managers to trade shares more frequently than they told investors they would, raising concerns this could drive costs higher, a study showed on Tuesday.
The study, by consultants Mercer and funded by the IRRC Institute, a not-for-profit organisation, found nearly two-thirds of institutional equity strategies have higher portfolio turnover rates than investors are told in the fund literature.
Short-termism -- trading in and out of stocks, instead of buying and holding a stock for at least a year -- has also been criticised by policy-makers, academics and industry participants as it hinders companies from managing their businesses for the long term.
The study found that 65 percent of institutional investor-focussed strategies exceeded their expected turnover in the period June 2006 to June 2009.
On average, turnover was 26 percent higher than the fund managers had anticipated, with some strategies reporting a turnover between 150 and 200 percent more than they had expected.
Fund managers interviewed for the study recognised the potential destructive nature of short-termism, acknowledging that it places pressure on companies to meet quarterly numbers, increases market volatility and demonstrates a lack of discipline in their investment processes.
Jon Lukomnik, program director for the IRRC Institute, said the findings should raise serious questions for investors.
"When managers greatly exceed their expected turnover level, the impact can be significant in terms of cost, performance, and the risk that the strategy is not being managed in line with its stated investment approach," he said.
Danyelle Guyatt, head of research for Mercer's responsible investment team and co-author of the report, added that investors interested in a strategy that seeks to capitalise on longer-term trends need to be aware if this is changing and why.
Some 991 strategies were examined for the study, comparing intended and realised average holding periods for various investment products across different regions and styles.
This found that of the 822 strategies for which Mercer had expected and actual turnover information, 550 exceeded the turnover during the sample period.
However, value managers did tend to have a lower annual turnover figure than other style types, due to their relying less on momentum and shorter-term drivers.
The report authors accepted that short-termism may have been exacerbated by the credit crisis and the related market volatility, but added: "Behavioural finance evidence suggests that investor psychology and speculative investment activity contribute to higher asset price volatility, creating a vicious cycle of asset price volatility and short-term horizons."
(Reporting by Claire Milhench; Editing by Louise Heavens)
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