What is the meaning of turnover ratio?
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The rate of which assets in a fund are bought and sold by the portfolio managers Show
What is the Portfolio Turnover Ratio?The portfolio turnover ratio is the rate of which assets in a fund are bought and sold by the portfolio managers. In other words, the portfolio turnover ratio refers to the percentage change of the assets in a fund over a one-year period. Formula for the Portfolio Turnover RatioThe formula for the portfolio turnover ratio is as follows: Where:
Interpreting the Portfolio Turnover RatioFor example, a 5% portfolio turnover ratio suggests that 5% of the portfolio holdings changed over a one-year time period. A ratio of 100% or greater indicates that all the securities in the fund were either sold or replaced with other holdings over a one-year period. The portfolio turnover ratio is important to consider before purchasing a mutual fund or a similar financial instrument, as it affects the investment return of the fund. Generally speaking, a low turnover ratio is desirable over a high turnover ratio. The rationale is that there are transaction costs involved with making trades (buying and selling securities). In addition, funds with a higher portfolio turnover ratio are more likely to incur higher capital gains taxes. All else equal, a portfolio with a higher turnover ratio will be incurring more expenses than a fund with a lower turnover ratio. However, it is not to say that a high portfolio turnover ratio is not desirable. A high turnover ratio is justified if the fund manager is able to generate comparatively higher returns (on a risk-adjusted basis) than a similar-style fund with a low turnover ratio. If the ratio is high, and the fund is underperforming its benchmark on a risk-adjusted basis, investors should be looking at alternative funds. Portfolio Turnover Ratio and Investment StrategiesThe portfolio turnover ratio provides insight into how a fund manager manages its fund. Generally speaking, a portfolio turnover ratio is considered low when the ratio is 30% or lower. When the turnover ratio is low, it indicates that the fund manager is following a buy-and-hold investment strategy. Funds with a low turnover ratio are called passively managed funds. On the other hand, funds with a high turnover ratio indicate a considerable amount of buying and selling of securities (a fast-paced investment strategy). Funds with a high turnover ratio are called actively managed funds. In addition, it is useful to track the ratio on a trended basis. It is done to determine if the fund manager’s investment strategy has changed. For example, a portfolio turnover ratio change from 20% to 80% over a three-year period would indicate that the fund manager has dramatically changed investment strategies. Practical ExamplesExample 1: Calculating the Portfolio Turnover Ratio A fund purchased and sold $10 million and $8 million of securities, respectively, over a one-year time period. Over the one-year period, the fund held average net assets of $50 million. What is the fund’s portfolio turnover ratio over the past year? Solution: The portfolio turnover ratio for the fund is calculated as ($8M / $50M) x 100 = 16%. Example 2: Inferring the Investment Strategy Through the Portfolio Turnover Ratio A fund prefers an investment strategy of capitalizing on changing market conditions. The fund’s portfolio turnover ratio was reported to be 95%. What would it imply about the fund’s investment strategy? Solution: Due to the fund’s portfolio turnover ratio of 95%, it would imply that the fund follows a fast-paced and aggressive investment strategy. Additional ResourcesThank you for reading CFI’s guide on Portfolio Turnover Ratio. To help you become a world-class financial analyst and advance your career to your fullest potential, the additional resources will be very helpful:
What does turnover ratio tell you?A turnover ratio represents the amount of assets or liabilities that a company replaces in relation to its sales. The concept is useful for determining the efficiency with which a business utilizes its assets.
What is a good total turnover ratio?In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that's between 0.25 and 0.5.
What is turnover ratio formula?Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory.
What turnover means?Turnover is the total sales made by a business in a certain period. It's sometimes referred to as 'gross revenue' or 'income'. This is different to profit, which is a measure of earnings.
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