Annual turnover is the percentage rate at which something changes ownership over the course of a year. For businesses, this rate may pertain to inventories, receivables, payables, or assets. In terms of investments, especially mutual funds or exchange-traded funds (ETFs), the annual turnover rate replaces their investment holdings on a yearly basis. Portfolio turnover essentially compares assets under management (AUM) to the inflow or outflow of a fund’s holdings, indicating the activity level within the portfolio. High turnover rates suggest active management, while lower rates often imply passively managed funds like index funds.
Key Takeaways
- A turnover rate measures how often an asset, security, or payment changes hands in a year.
- Businesses utilize annual turnover rates to gauge efficiency and productivity, while investors and investment managers look at these rates to understand portfolio activity.
- Annualized turnover is often projected based on a month or another short period of time.
- A high turnover rate alone doesn’t guarantee fund quality or performance.
Calculating Annual Turnover
To calculate the portfolio turnover ratio for a fund, first determine the total amount of assets bought or sold (whichever is greater) during the year. Then, divide that amount by the fund’s average assets over the year.
[\text{portfolio turnover} = \frac{\max{\text{fund purchases}, \text{fund sales}}}{\text{average assets}}]
For example, if a mutual fund manages assets worth $100 million and sells $75 million of these assets during the year, the calculation would be:
[\frac{$75\text{m}}{$100\text{m}} = 0.75 \left(\text{75%}\right)]
A 100% annual turnover means the fund didn’t necessarily liquidate all positions it held at the start of the year but had sales equaling total AUM over the year—indicating frequent trading.
Annualized Turnover in Investments
Annualized turnover projects future activity based on short periods like a month. For instance, if an ETF experiences a 5% turnover rate in February, this projected over 12 months provides a potential 60% annual turnover rate.
Actively Managed Funds
Growth funds deploy trading strategies and stock selection by experienced managers aiming to outperform benchmark indices. An example is the American Century Small Cap Growth Fund, which had a 141% turnover rate yet consistently outperformed the S&P 500 over 15 years up to 2021.
Passively Managed Funds
Index funds like the Fidelity 500 Index Fund adopt a buy-and-hold strategy, maintaining positions as long as they remain part of the benchmark index. With minimal trading, these funds often align closely with their indices. For example, the Fidelity 500 Index Fund had only a 4% turnover rate and reflected a high degree of stability compared to actively managed counterparts.
A high turnover rate alone doesn’t suggest higher quality; for example, despite a low turnover rate, the Fidelity Spartan 500 Index Fund slightly lagged behind the S&P 500 in 2020.
Annual Turnover in Business: Inventory Turnover
Businesses use annual turnover metrics to evaluate performance. Inventory turnover measures how fast inventory is sold relative to industry averages. Low turnover could suggest weak sales or overstocking, while high turnover can indicate strong sales or inadequate stock. Efficient inventory management often leads to better business performance as swift stock movement minimizes holding costs and prompts consumer returns for new goods.
Related Terms: inventory turnover, assets under management, actively managed funds, passively managed funds.
