Buy Aggressive Growth, High Turnover Stock Mutual Funds

Many investment pundits suggest avoiding stock mutual funds with high portfolio turnover (those that frequently buy and sell stocks). The pundits reason that funds with high turnover also have high expenses that will hurt the performance of the fund. After all, the fund must absorb the extra commissions and employ more staff and other resources to handle the high volume of stocks bought and sold.

But high turnover funds, particularly growth-oriented funds, actually manage to eke out the best performance among all mutual funds.

Why?

"Funds that spend the most on research and trade the most, may, in fact, be uncovering underpriced stocks," according to two finance professors at the University of California at Los Angeles. In effect, these professors are saying that you can beat the market indices if you work and look hard enough. This belief stands in stark contrast to the random-walk hypothesis, which believes that you can never beat the market and that current stock prices always reflect all information about a given company.

The professors surveyed American mutual funds and found that those with high portfolio turnover added an extra 0.8 percent to their total return. If the fund had low turnover, its total return was reduced by 1.3 percent.

Aggressive growth funds with high turnover added an extra 2.8 percent to their total return compared to all stock mutual funds, growth funds and growth and income funds, which does seem to indicate that fund characteristics do matter.

The bottom line: if you're happy with your current stock mutual funds, stick with them. If you want to be daring, find aggressive growth mutual funds with good track records and managers willing to cut their losses or take profits quickly to find better stocks.

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