What is Annual Turnover?
766 reads · Last updated: December 5, 2024
Annual turnover is the percentage rate at which something changes ownership over the course of a year. For a business, this rate could be related to its yearly turnover in inventories, receivables, payables, or assets.In investments, a mutual fund or exchange-traded fund (ETF) turnover rate replaces its investment holdings on a yearly basis. Portfolio turnover is the comparison of assets under management (AUM) to the inflow, or outflow, of a fund's holdings. The figure is useful to determine how actively the fund changes the underlying positions in its holdings. High figure turnover rates indicate an actively managed fund. Other funds are more passive and have a lower percentage of holding turnovers. An index fund is an example of a passive holding fund.
Definition
Annual turnover refers to the percentage change in ownership over a year. For businesses, this rate can relate to the turnover of inventory, accounts receivable, accounts payable, or assets annually. In investments, the turnover rate of mutual funds or exchange-traded funds (ETFs) indicates how often the fund changes its investment holdings each year. Assets under management (AUM) are compared with the inflows or outflows held by the fund to determine the fund's activity level in holding positions. A higher turnover rate indicates active management of the fund. Other funds are more passive, with lower turnover rates of holdings. Index funds are an example of passively held funds.
Origin
The concept of annual turnover originated in the fields of business management and investment management. As businesses and investment markets became more complex, measuring the liquidity and management efficiency of assets and portfolios became increasingly important. Particularly in the late 20th century, with the rise of mutual funds and ETFs, annual turnover became a key metric for assessing fund management styles.
Categories and Features
Annual turnover can be categorized into business turnover and investment turnover. Business turnover typically involves the turnover rates of inventory, accounts receivable, and accounts payable, reflecting the operational efficiency of a company. Investment turnover focuses on the frequency of changes in a fund's investment holdings. A higher turnover rate usually indicates a more active management style, while a lower turnover rate suggests a more passive management style, such as that of index funds.
Case Studies
Case 1: A large retail company has an annual inventory turnover rate of 5, meaning its inventory is sold and replenished five times on average in a year. This indicates high efficiency in inventory management. Case 2: A mutual fund with an annual turnover rate of 150% means the fund has changed its portfolio 1.5 times in a year, demonstrating an active investment management strategy.
Common Issues
Investors often misunderstand that a high turnover rate is always beneficial, but in reality, a high turnover rate can lead to higher transaction costs and tax implications. Additionally, a low turnover rate does not necessarily mean poor fund performance, especially in less volatile market conditions.
