Turnover

Turnover or Turnover Ratio is a measure of the fund’s trading activity which is computed by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly net assets. A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded. In practical terms, the resulting percentage loosely represents the percentage of the portfolio’s holdings that have changed over the past year.

A low turnover figure (20% to 30%) would indicate a buy-and-hold strategy. High turnover (more than 100%) would indicate an investment strategy involving considerable buying and selling of securities.

Turnover is calculated on the lesser of purchases or sales. Therefore, a $100 million fund that is rapidly growing may buy another $100 million in assets, but have a zero percent turnover if it does not sell any of its holdings.

Turnover is important for several reasons. First, it’s an indication of management strategy buy-and-hold vs. trading on short-term fluctuations. Second, funds with higher turnover (implying more trading activity) incur greater brokerage fees for affecting the trades. Third, funds with higher turnover tend to distribute more capital gains than low turnover funds, because high-turnover funds are constantly realizing the gains. Studies show, however, that funds must have very low turnovers (specifically 10% or less) to make appreciable differences in the capital gains distributions. A change in a fund’s general turnover pattern can indicate changing market conditions, a new management style, or a change in the fund’s investment objective.