Should Long-Term Retail Investors Follow Expert Advice on Stocks? [Exploring Portfolio Turnover Ratio]

When retail investors hear stock market experts (Portfolio Managers from fund houses) on television or in financial news, the advice often feels compelling. Experts declare certain industries “uninvestable” or express bullishness on others. These statements can create confusion for investors with a long-term horizon of 5-7 years. Why? Should you base your stock-picking strategy on their opinions? To unravel this, we need to look at portfolio turnover data and understand why industries labeled “unfavourable” by experts might sometimes hold long-term value.

Topics:

• 1. Portfolio Turnover Data Explained [Answer is here]

• 2. Why Experts Dismiss Some Industries

• 3. The Hidden Value in Ignored Industries

• 4. Should Retail Investors Follow Expert Advice?

• 5. My Perspective as a Long-Term Investor

1. Portfolio Turnover Data Explained [Answer is Here]

Should long-term retail investors follow expert advice on stocks? The answer to this question is hidden on this metric called “Portfolio Turnover Ratio.” Let’s know more about it.

Portfolio turnover ratio (PTR) is a metric that reveals how frequently a mutual fund manager buys or sells stocks in their portfolio. In simpler terms, it measures how often the portfolio is “churned.” For example, a PTR of 100% indicates that the entire portfolio changes over the course of a year. Means, the stocks are being held in the portfolio for a year or less.

Here is the data for top mutual fund schemes in India with their indicative PTR and average stock holding time in years:

See here for a more comprehensive list of Mutual Funds with PTR data.

I observed Portfolio Turnover Ratio (PTR) for about 170 number mutual fund schemes. My observations are as below:

Holding Time (Yrs)	Percentage
Upto 1 Year	12.94%
Upto 2 Years	34.12%
Upto 3 Years	61.18%
Upto 4 Years	81.18%
Upto 5 Years	88.24%
Upto 6 Years	92.35%
Upto 7 Years	96.47%
Above 7 Years	100.00%

• Out of all mutual fund schemes, a majority of them (61.18%) holds stocks for only less than 3 years.
• Only about 10% mutual fund schemes, hold their stocks for more than 5 years.

The PTR of a mutual fund gives us a critical insight about how mutual funds are managed.

• High PTRs, often exceeding 33% (holding time <3 years), signal a short-term strategy. In high PTR funds, fund managers prioritize capturing near-term opportunities. For people like me, it is a sharp contrast to the long-term approach I aspire to follow.

High PTRs (above 33%) tell us that many fund managers hold stocks for less than three years.

Their aim is to outperform benchmarks or meet quarterly expectations.

Such strategies often focus on trending sectors where immediate returns seem promising. But in the process of following such a strategy, fundamentally sound industries which are currently out of favor gets ignored. Stocks within such industries will get high returns for holding periods like 5-7 years. But as our mutual fund managers are mostly focusing on immediate returns (< 3 years), their stock commentaries look less reliable to me.

This discrepancy between “short-term fund manager goals” and “long-term wealth creation” highlights why hearing comments of fund managers on TV is not so effective & reliable.

I will even go to the extent of saying that their commentaries have the potential to even mislead long-term investors.

In fact, the industries they avoid today might offer value to someone with the patience to hold quality stocks for say 7-8 years.

2. Why Experts Dismiss Some Industries

When experts criticize an industry, they often focus on immediate hurdles.

You will often see these experts quoting factors like slowing demand, regulatory challenges, or weak market sentiment, high inflation, oil prices, etc. But all of these factors are mostly cyclical in nature. Sometimes they are favourable and sometimes unfavourable. Hence, their effect on our stock market is also (only) cyclical.

A long-term investor, who buys stocks with a holding periods going in decade, should not worry too much about short-term cyclicality.

For example, in November 2024, you will see experts labelling the consumer (specifically FMCG) industry, as avoidable due to stagnant rural demand or margin pressures. But this is only a temporary and current phenomenon, right? In a country like India, where GDP and per-capita income of the population is growing (at about 7% p.a.), shall the FMCG sector be referred as “avoidable?”

In fact, when the things are not going well for this sector (like weak demand), this is the time when professional long-term investors (buying stocks for themselves, not for others) actually accumulate these type of stocks.

Hear The Experts, But Do Your Thing

Hence, assessments of experts on TV, are mostly valid in the short term. They are often speaking for people whose focus in on shorter holding periods (of < 3 years).

A long-term investor should assess whether these challenges are temporary or structural. For instance, FMCG companies benefit from India’s growing middle class and urbanization trends. A short-term slowdown might provide a valuable entry point in fundamentally strong stocks from this industry.

On the other hand, some industries are genuinely in decline. For example, sectors impacted by technological disruption, such as traditional print media, may struggle to recover. I take commentaries of these experts more seriously on themes like PSU and Real Estate. Why? Because the down-cycle or up-cycle of these themes can extend for a very long time (like 7-10 years).

Retail investors must evaluate whether the bearishness around an industry reflects temporary challenges or irreversible decline.

3. The Hidden Value in Ignored Industries

History shows that industries often move in cycles.

A sector shunned by experts today may become a market favorite tomorrow. Take the example of the Indian pharmaceutical industry in 2017. Back then, regulatory pressures and pricing challenges in the U.S. market caused widespread pessimism. However, long-term investors who stayed patient reaped significant returns as the sector regained momentum. For example, since Nov’2017, the Sun Pharma stock has compounded at 18.7% per annum (till Nov 2024).

Experts’ avoidance of certain industries can create value opportunities for retail investors with a 5-7 year horizon. When industries fall out of favor, valuations often become attractive.

Companies with solid balance sheets, competitive advantages, and growth potential can be picked up at discounted prices during these periods.

To illustrate, consider the following approach:

• Industry Focus: Look for industries facing short-term challenges but backed by strong long-term drivers. For instance, sectors like renewable energy and domestic manufacturing may face near-term volatility but are supported by structural growth trends.
• Company Focus: Focus on companies with sound fundamentals, such as low debt, consistent cash flows, and competent management. Ignoring industry noise and focusing on stock-level fundamentals often leads to better outcomes.
• Value Focus: Use valuation metrics like price-to-earnings (P/E) and price-to-book (P/B) ratios to compare stocks within a sector. A high-quality company trading below its historical average valuation may indicate a value-buy opportunity.

4. Should Retail Investors Follow Expert Advice?

Experts, from mutual fund industry, often provide valuable insights into market trends.

But their advice is not a one-size-fits-all solution. Their short-term perspective, highlighted by their high portfolio turnover data, gives us an extremely critical understanding. Their need to outperform in specific cycles, rarely aligns with the goals of a long-term retail investor.

So I’ll suggest that, though we all must hear the commentaries of mutual fund managers, but hear them with this realization that they often hold stock for not more than 2-3 years. Their priority is to make their scheme’s outperform the benchmark (even) in short-term which will eventually transform into long-term outperformance.

But for we retail long term investors, we are not bound to act like this. For us, short-term outperformance will work. Why? Because we can afford to make that compromise for the sake of long-term multi-bagger returns (for 7, 10, 15, even 20 years time horizons).

As a long-term investor, our primary focus should be building a portfolio of quality stocks which are bought at times when their stocks were trading at a discount. Such an investment strategy will align with our distant goals of life (like financial independence, retirement, etc).

So, what are our specific “to-do’s”:

• Ignoring short-term market noise and sticking to a disciplined investment plan.
• Conducting own research or using trusted tools to analyze sectors and companies (I do it using my Stock Engine).
• Viewing expert commentary as one of many inputs, not as a definitive guide.

For example, if experts are bearish on the FMCG industry, evaluate why. If the concerns are temporary, such as high inflation affecting rural demand, it might be an opportunity to accumulate shares of strong companies at lower valuations.

However, avoid sectors where fundamental issues like poor governance or declining relevance dominate.

5. My Perspective as a Long-Term Investor

Over the years, I’ve seen retail investors rush into trending sectors or abandon quality stocks based on short-term commentary.

This approach seldom builds wealth.

The real magic of compounding works when you buy quality businesses at reasonable valuations and hold them through cycles.

Experts serve a different audience and often have conflicting objectives. While their commentary can help identify trends, retail investors must view it through the lens of their own goals.

Instead of chasing trends, focus on industries and companies that align with long-term drivers like India’s demographic dividend, digital transformation, and urbanization.

The answer to whether you should follow expert advice lies in understanding its limitations.

By combining insights from portfolio turnover data with independent research, you can identify opportunities in ignored or undervalued industries. These “hidden gems” may hold the key to wealth creation over a 5-7 year horizon.

If you found this article useful, please share it with fellow investors or leave your thoughts in the comments below!

Have a happy investing.

List of Mutual Funds with its Portfolio Turnover Ratio (PTR) and Holding Time