PortfoIio Turnover a Necessary Cost

Best practices for minimal impact and maximum implementation

Julie Abbett Portfolio Manager at ndexQ

Turnover is necessary because it enables an active asset allocator with skill to realize any value
that they believe their models can add. Unless one trades on new information, the portfolio will
become stale and the alpha will slowly decay over time. Although turnover cannot be avoided
one must be cautious and focus on trading as efficiently as possible. This is true especially in
volatile markets where both bid/ask spreads and market impact are at their peak. By tying the
implicit and explicit cost of trading directly to the models expected return one is actively
adjusting to higher transaction cost regimes and generating a higher hurdle rate by which to
trade.
Although there are no exact apples to apples comparison in analyzing a fund manager's
transaction costs relative to another we believe that there are certain best practices one may
follow. Trading wisely will enable a manager to maintain low total cost per share which includes
commission, bid-ask spread and the largest component market mpact.
Although there are many factors that will determine total trading costs, we believe maintaining a
diligent trading process can keep transaction cost low when measured as percentage of
portfolio return. One of these factors is identifying all sources of hidden liquidity as well as
timely implementation to reduce shortfall due to alpha decay and further slippage.
As a follow-up to our ETF liquidity discussion (The Cost Of Trading ETFs: Look At NAV, Not
VoIume & Common Myths, Best Practices And Better Trading Execution For ETFs) we
have also posted a link to our liquidity webinar highlighting trading large blocks of CP quickly
and efficiently, our Q Real Return ETF. The webinar, hosted by ndexQ & Deutsche Bank,
focuses on how to implement what we believe are the best practices for trading ETFs in these
markets as well as a general rule of thumb to trading ETFs.
The objective of CP seeks investment results that correspond, before fees and expenses, to
the price and yield performance of the Q Real Return ndex. The ndex seeks to provide a
hedge against the U.S. inflation rate by providing a "real return or a return above the rate of
inflation, as represented by the Consumer Price ndex, which is published by the Bureau of
Labor Statistics and is a measure of the average change in prices over time of goods and
services purchased by households.
Webinar Link:
hLLps//cccalllnfocom/cc/s/show8eg?udc1xmefhldqevdbelqb830ee2a39cb4bae9fe971cbcd17b222
|ease see |||ustrat|ve v|sua| of L1I n|dden L|qu|d|ty (Iust the t|p of the Iceberg) wh|ch goes a|ong w|th
understand|ng a|| sources of ||qu|d|ty and therefore |ead|ng to |ower transact|on costs
or lnLernal use only
L1 Pldden LlquldlLy
!usL 1he 1lp of 1he lceberg
8ID ASk
2S86 2S9S kICL
SI2L 12k S00
P
l
u
u
L
n
D|rect Market Maker]Author|zed art|c|pant uote
CI
ADVLk1ISLD 8LS1 8ID CIILk
(keach out to two or more brokers and ask for a pr|nc|pa| quote)
Actua| Deutsche 8ank uotes 10k
7Sk
100k
1 M
300k
DAkk CCL
(Add|t|ona| n|dden L|qu|d|ty)
Last r|ce 2390 Intraday Ind|cat|ve Va|ue 2391
2S89
2S89
2S88
2S87
2S87
2S92
2S92
2S92
2S93
2S94
.Actual Bloomberg Market Depth Quotes
2.DB quotes are for illustrative purposes; actual quotes are subject to change