Question

2. Calculate the portfolio turnover ratio for each fund. Which two funds are most likely to be actively managed and which two are most likely passive funds? Explain. Calculate the tax cost ratio for each fund. Which funds were the most and least tax efficient in the operations? Why?

	Fund W	Fund X	FundY	Fund Z
Assets under Management, Avg for past 12 months (mil)	$302.50	$652.75	$1,354.90	$4,327.30
Security Sales, Past 12 months (mil)	$45.20	$555.30	$1,173.80	$475.10
Expense Ratio	0.35%	0.75%	1.10%	0.25%
Pre-tax Return, 3-year avg	9.74%	10.25%	10.89%	9.99%
Tax-adjusted Return, 3-year avg	9.24%	8.00%	9.21%	9.88%

Answer 1

Portfolio Turnover Ration indicates the % amount of securities in the portfolio bought or sold in a given period based on the average asset value under management of that period. Higher the %, the higher proportion of securities were sold or brought by the fund manager in the given period.

Actively managed funds are the one where the fund manager try to create a portfolio alpha (exess return than the market)  by adding or selling the securities based on the market conditions. On the other hand, passively managed funds are just to replicate the return of any underlining benchmark (S&P 500, Nasdaq return). Hence, it is imperative that the actively managed funds will have more funds sold or bought in a given period as compare to the passively managed funds.

Hence, the portfolio turnover ration with higher % is more likely to be managed actively as compare to the passively managed fund.

Answer: Fund W and Fund X seem to be actively managed and Fund Y and Fund Z to be passively managed.

Tax cost ratio calculates the % of funds annual return impacted by taxes that the investors must pay on dividends, distributions and capital gains returned during a year. Hence, more the %, more amount of the return are been taxed. Though the taxation on the fund have many other parameter like the proportion of the debt held, dividend paid in the year by the equity in the fund and also, the portfolio turnover ratio (higher the ratio, higher the taxes), from the given information we can say the Fund X and Fund Y are least tax efficient as compare to the Fund W and Fund Z.