Annual turnover is a term that is used to describe the degree of change that takes place within a calendar year. Generally presented as a percentage, a turnover may be calculated to describe change within an employee force, then holdings within an investment portfolio, or shifts with the investments held by a mutual fund or some type of exchange-traded fund. In each application, identifying the annual turnover ratio and the reasons behind the changes that took place are invaluable when it comes to planning for the future.
When it comes to annual employee turnover, most businesses seek to keep the ratio as low as possible. When an employee is hired, the employer makes an investment in that employee, most commonly by training the employee to perform tasks that he or she may not have handled in the past. Since it costs money to train new employees, holding on to current employees who are fully competent in their positions is in the best interests of the company. For this reason, companies will often offer incentives to remain with the business over the long-term. As a bonus, keeping the annual turnover low also increases the perception that the business is stable and likely to be around for many years.
As it relates to investment activity, an annual turnover is the ratio or percentage of changes that take place within an investment portfolio over the course of a calendar year. With this application, a higher annual turnover is not necessarily a negative thing, if that turnover actually enhanced the value and diversity of the portfolio. For example, if an investor began the year with a portfolio that was overwhelmingly composed of stock options associated with a single industry, the need to diversify would be apparent. Assuming that over the year the investor took steps to secure stocks related to other industries, purchased a few bond issues, and eventually decreased his or her market exposure in that one industry, there is a good chance that the portfolio will generate a higher return. At the same time, the portfolio will be positioned to protect the investor from a sudden downturn within any one industry.
Annual turnover is also used to describe the rate of change within a mutual fund or some type of exchange-traded fund within a given year. As with diversifying a portfolio, the managers of a mutual fund will constantly evaluate new investment options for inclusion in the fund. This may involve selling investments that are not performing up to par, and are not projected to improve in performance for some time. When this is the case, a higher annual turnover is considered a positive event, since making those changed protected the best interest of investors in the fund, and allowed the rate of return to be as high as possible.
