Annual Holdings Turnover – Definition

Cite this article as:"Annual Holdings Turnover – Definition," in The Business Professor, updated April 7, 2020, last accessed August 5, 2020,


Annual Holdings Turnover

Annual holdings turnover refers to the percentage rate at which an exchange-traded fund or mutual fund replaces its holdings on investment every year. Turnover involves comparing assets under management to the security holding’s outflow or inflow. Annual holdings turnover figures are important when it comes to determining the activeness of the fund changes underlying position when in its holdings. A turnover rate with a high figure is an indication the fund is actively managed. Those with a low figure indicate that the funds are passive hence a low turnover rate.

A Little More on What is Annual Holdings Turnover

Some index funds adopt a strategy known as buy-and-hold. A good example of the fund that applies this strategy is the Fidelity Spartan 500 Index Fund. This system ensures that funds own positions in equity provided that they continue to be components of the benchmark. The funds usually maintain a positive and perfect correlation to the index, turning the portfolio’s turnover rate to 5%.

What happens is that there is usually limiting trading activity to purchasing securities inflows. Also, the infrequently selling issues are eliminated from the index. So, most of the time, 60% indices outpaces the managed funds. It is worth noting that a high turnover rate has never been a fund quality or performance indicator.

About Annualized Turnover

Annualized turnover refers to a future projection based on either one month or an investment turnover’s shorter period of time. It helps an investor to estimate the coming year’s annual turnover. For example, if the month of February has a turnover rate of say 5%, then an investor can multiply one month’s turnover rate by 12. From this example, it means that the calculation will provide a 60% annualized holdings turnover rate.

Annual Turnover Calculation

The total amount of the purchased or sold assets must be available to be able to calculate the turnover ratio. Let’s say a fund is holding $100 million in assets under management, also known as AUM. Let’s also assume that $75 million of those assets undergo liquidation during the measurement period. In this case, the annual calculation turnover will be as follows:

Assets sold/AUM= Turnover rate (which as per the example is 75%)

Reference for “Annual turnover” › Investing › Mutual Funds

Academics research on “Annual turnover”

Corporate performance, corporate takeovers, and management turnover, Martin, K. J., & McConnell, J. J. (1991). Corporate performance, corporate takeovers, and management turnover. The Journal of Finance46(2), 671-687. This paper examines the hypothesis that an important role of corporate takeovers is to discipline the top managers of poorly performing target firms. We document that the turnover rate for the top manager of target firms in tender offer‐takeovers significantly increases following completion of the takeover and that prior to the takeover these firms were significantly under‐performing other firms in their industry as well as other target firms which had no post‐takeover change in the top executive. We interpret the results to indicate that the takeover market plays an important role in controlling the nonvalue maximizing behavior of top corporate managers.

Home bias and high turnover, Tesar, L. L., & Werner, I. M. (1995). Home bias and high turnover. Journal of international Money and Finance14(4), 467-492. This paper documents the available evidence on international portfolio investment in five OECD countries. We draw three conclusions from the data. First, there is strong evidence of a home bias in national investment portfolios despite the potential gains from international diversification. Second, the composition of the portfolio of foreign securities seems to reflect factors other than diversification of risk. Third, the high volume of cross-border capital flows and the high turnover rate on foreign equity investments relative to turnover on domestic equity markets suggests that variable transactions costs are an unlikely explanation for home bias.

What Does Fortune 500 Turnover Mean?, Stangler, D., & Arbesman, S. (2012). What Does Fortune 500 Turnover Mean?. In The Princess Bride, the lead kidnapper, Vizzini, dismisses missteps in his ill-fated scheme with a frustrated exclamation, “Inconceivable!” At length, his soft-spoken mercenary, Inigo Montoya, ventures: “You keep using that word. I do not think it means what you think it means.” An equivalent asymmetry in the world of economic analysis is the use of turnover on the Fortune 500 list. For years, many people have cited turnover — and ostensibly rising turnover — as a proxy for positive economic churn and rapid changes in the U.S. economy that are supposed to reflect underlying strengths in innovation and productivity. We find that, while annual turnover on the list has, on average, increased since the early 1980s, it doesn’t quite mean what many people think it means.

Ownership structure and top executive turnover, Denis, D. J., Denis, D. K., & Sarin, A. (1997). Ownership structure and top executive turnover. Journal of financial economics45(2), 193-221. We report that ownership structure significantly affects the likelihood of a change in top executive. Controlling for stock price performance, the probability of top executive turnover is negatively related to the ownership stake of officers and directors and positively related to the presence of an outside blockholder. In addition, the likehood of a change in top executive is significantly less sensitive to stock price performance in firms with higher managerial ownership. Finally, we document an unusually high rate of corporate control activity in the twelve months preceding top executive turnover. We conclude that ownership structure has an important influence on internal monitoring efforts and that this influence stems in part from the effect of ownership structure on external control threats.

Firm performance, corporate governance, and top executive turnover in Japan, Kang, J. K., & Shivdasani, A. (1995). Firm performance, corporate governance, and top executive turnover in Japan. Journal of financial economics38(1), 29-58. We examine the role of corporate governance mechanisms during top executive turnover in Japanese corporations. Consistent with evidence from U.S. data, the likelihood of nonroutine turnover is significantly related to industry-adjusted return on assets, excess stock returns, and negative operating income, but is not related to industry performance. The sensitivity of nonroutine turnover to earnings performance is higher for firms with ties to a main bank than for firms without such ties. Outside succession in Japan is more likely for firms with large shareholders and a main bank relationship. We document performance improvements subsequent to nonroutine turnover and outside succession.

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