Annual Turnover

Definition

Annual turnover measures how frequently assets, securities, or inventory change ownership over a one‑year period. It indicates activity levels in investment funds (how often holdings are bought and sold) and business efficiency (how quickly inventory is sold). Turnover alone does not determine quality or performance.

Portfolio (Investment Fund) Turnover

Portfolio turnover shows how actively a fund is managed.

Calculation:
portfolio turnover = max(fund purchases, fund sales) / average assets

Example:
If a fund has $100 million in assets and $75 million of purchases or sales during the year:
$75m / $100m = 0.75 → 75% turnover

Notes:
* A 100% turnover rate does not mean all original positions were sold; it reflects the total trading volume relative to average assets.
* Turnover can be measured either by value (dollars) or by number of securities bought/sold during the period.
* High turnover often indicates active management; low turnover suggests a buy‑and‑hold or index approach. Neither is inherently better—each has tradeoffs in costs, tax consequences, and performance potential.

Annualized Turnover

Annualized turnover projects a full‑year turnover rate from a shorter period. For example, a 5% turnover in one month annualizes to roughly 5% × 12 = 60%. This projection can be misleading if short‑term activity is not representative of normal trading.

Active vs. Passive Fund Dynamics

• Actively managed funds: managers trade frequently to outperform benchmarks; these funds typically show higher turnover and higher trading costs but may capture short‑term opportunities.
• Passively managed (index) funds: follow a benchmark, trade infrequently, and usually have low turnover—trading mostly to reflect index reconstitution or cash flows.

Considerations:
* High turnover increases transaction costs and potential taxable events, which can reduce net returns.
* Low turnover reduces trading costs and tax events but may underperform if active management would have avoided losses or captured gains.

Inventory Turnover (Business)

Inventory turnover measures how quickly a company sells and replaces inventory. It’s used to evaluate sales efficiency and inventory management.

Common formula:
inventory turnover = cost of goods sold / average inventory

Interpretation:
* Low turnover can indicate weak sales, overstocking, or marketing/merchandising problems. In some cases (anticipation of price rises or shortages) low turnover can be strategic.
* High turnover often signals strong demand or insufficient inventory, which can lead to stockouts and lost sales.
* Faster inventory turnover generally reduces holding costs and improves cash flow.

Key Takeaways

• Annual turnover quantifies how often assets or inventory change hands in a year.
• For funds, turnover helps distinguish active from passive management but is not a standalone indicator of quality.
• Annualized turnover can mislead if based on a short period that isn’t typical.
• Inventory turnover is a critical metric for business performance; optimal turnover balances sales, carrying costs, and stock availability.