The fund turnover ratio can also be affected by some fund characteristics, such as the age (Golec, 1996), size, or expenses (Lin and Yung, 2004), and it can be influenced by other factors related to efficiency or agency problems (Lavin and Magner, 2014).
Regarding the relationship between turnover and fund performance, there is some controversy about this topic in the previous literature. Some authors do not find any relationship between these variables (Ippolito, 1989; Gottesman and Morey, 2007). Other authors (Taylor and Yoder, 1994; Wermers, 2000; Dahlquist et al., 2000) argue in favor of high-turnover funds, while Elton et al. (1993) and Chow et al. (2011) find evidence that these funds experience lower returns.
Hence, the main aim of this paper is to analyze the performance experienced by funds with different turnover levels, and identifying the factors that explain the turnover ratio reached by mutual funds. Using a sample of US equity mutual funds, we show that the group of funds with higher turnover ratio do not beat the low-turnover funds during the 1999 – 2014 period. Moreover, the first group of funds significantly underperform the second ones during the period 2008 – 2014. In addition, we show that fund turnover ratio is persistent over time, evidence that, to our knowledge, has not previously been demonstrated. Then, a fund experiencing a specific turnover ratio during a year is likely to reach a similar level of turnover during the following period. Given this persistence, a strategy based on investing in lagged low-turnover funds can be more beneficial to investors that a strategy based on investing in lagged high-turnover funds.