What Is Annual Turnover?

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.

Calculating Annual Turnover

To calculate the portfolio turnover ratio for a given fund, first determine the total amount of assets purchased or sold (whichever happens to be greater), during the year. Then, divide that amount by the average assets held by the fund over the same year.


$\begin{aligned}&\text{portfolio turnover}\ =\ \frac{\operatorname{max}\begin{cases} \text{fund purchases}\\ \quad \text{fund sales}\end{cases}}{\text{average assets}}\end{aligned}$​portfolio turnover = average assetsmax{fund purchasesfund sales​​​

For example, if a mutual fund held $100 million in assets under management (AUM) and $75 million of those assets were liquidated at some point during the measurement period, the calculation is:


$\begin{aligned}&\frac{\$75\text{m}}{\$100\text{m}}=0.75\\&\textbf{where:}\\&\text{m}=\text{million}\end{aligned}$​$100m$75m​=0.75where:​

It is important to note that a fund turning over at 100% annually has not necessarily liquidated all positions with which it began the year. Instead, the complete turnover accounts for the frequent trading in and out of positions and the fact that sales of securities equal total AUM for the year. Also, using the same formula, the turnover rate is also measured by the number of securities bought in the measurement period.

Annualized Turnover in Investments

Annualized turnover is a future projection based on one month—or another shorter period of time—of investment turnover. For example, suppose that an ETF has a 5% turnover rate for the month of February. Using that figure, an investor may estimate annual turnover for the coming year by multiplying the one-month turnover by 12. This calculation provides an annualized holdings turnover rate of 60%.

Actively Managed Funds

Growth funds rely on trading strategies and stock selection from seasoned professional managers who set their sights on outperforming the index against which the portfolio benchmarks. Owning large equity positions is less about a commitment to corporate governance than it is a means to positive shareholder results. Managers who consistently beat the indices stay on the job and attract significant capital inflows.

While the passive versus active management argument persists, high volume approaches can realize moderate success. Consider the American Century Small Cap Growth fund (ANOIX), a four-star-rated Morningstar fund with a frantic 141% turnover rate (as of February 2021) that outperformed the S&P 500 Index considently over the last 15 years (through 2021).

Passively Managed Funds

Index funds, such as the Fidelity 500 Index Fund (FXAIX), adopt a buy-and-hold strategy. Following this system, the fund owns positions in equities as long as they remain components of the benchmark. The funds maintain a perfect, positive correlation to the index, and thus, the portfolio turnover rate is just 4%. Trading activity is limited to purchasing securities from inflows and infrequently selling issues removed from the index. More than 60% of the time, indices have historically outpaced managed funds.

Also, it is important to note, a high turnover rate judged in isolation is never an indicator of fund quality or performance. The Fidelity Spartan 500 Index Fund, after expenses, trailed the S&P 500 by 2.57% in 2020.

Annual Turnover in Business: Inventory Turnover

Businesses use several annual turnover metrics for understanding how well the business is running on a yearly basis. Inventory turnover measures how fast a company sells inventory and how analysts compare it to industry averages. A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing. A high ratio implies either strong sales or insufficient inventory. The former is desirable while the latter could lead to lost business. Sometimes a low inventory turnover rate is a good thing, such as when prices are expected to rise (inventory pre-positioned to meet fast-rising demand) or when shortages are anticipated.

The speed at which a company can sell inventory is a critical measure of business performance. Retailers that move inventory out faster tend to outperform. The longer an item is held, the higher its holding cost will be, and the fewer reasons consumers will have to return to the shop for new items.

What Is Annual Percentage Rate (APR)?

Annual percentage rate (APR) refers to the yearly interest generated by a sum that’s charged to borrowers or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. This includes any fees or additional costs associated with the transaction but does not take compounding into account. The APR provides consumers with a bottom-line number they can compare among lenders, credit cards, or investment products.

How the Annual Percentage Rate (APR) Works

An annual percentage rate is expressed as an interest rate. It calculates what percentage of the principal you’ll pay each year by taking things such as monthly payments and fees into account. APR is also the annual rate of interest paid on investments without accounting for the compounding of interest within that year.

The Truth in Lending Act (TILA) of 1968 mandates that lenders disclose the APR they charge to borrowers. Credit card companies are allowed to advertise interest rates on a monthly basis, but they must clearly report the APR to customers before they sign an agreement.

How Is APR Calculated?

APR is calculated by multiplying the periodic interest rate by the number of periods in a year in which it was applied. It does not indicate how many times the rate is actually applied to the balance.

$\begin{aligned} &\text{APR} = \left ( \left ( \frac{ \frac{ \text{Fees} + \text{Interest} }{ \text {Principal} } }{ n } \right ) \times 365 \right ) \times 100 \\ &\textbf{where:} \\ &\text{Interest} = \text{Total interest paid over life of the loan} \\ &\text{Principal} = \text{Loan amount} \\ &n = \text{Number of days in loan term} \\ \end{aligned}$​APR=((nPrincipalFees+Interest​​)×365)×100where:Interest=Total interest paid over life of the loanPrincipal=Loan amountn=Number of days in loan term​

Types of APRs

Credit card APRs vary based on the type of charge. The credit card issuer may charge one APR for purchases, another for cash advances, and yet another for balance transfers from another card. Issuers also charge high-rate penalty APRs to customers for late payments or violating other terms of the cardholder agreement. There’s also the introductory APR—a low or 0% rate—with which many credit card companies try to entice new customers to sign up for a card.

Bank loans generally come with either fixed or variable APRs. A fixed APR loan has an interest rate that is guaranteed not to change during the life of the loan or credit facility. A variable APR loan has an interest rate that may change at any time.

The APR borrowers are charged also depends on their credit. The rates offered to those with excellent credit are significantly lower than those offered to those with bad credit.

APR vs. Annual Percentage Yield (APY)

Though an APR only accounts for simple interest, the annual percentage yield (APY) takes compound interest into account. As a result, a loan’s APY is higher than its APR. The higher the interest rate—and to a lesser extent, the smaller the compounding periods—the greater the difference between the APR and APY.

Imagine that a loan’s APR is 12%, and the loan compounds once a month. If an individual borrows $10,000, their interest for one month is 1% of the balance, or $100. That effectively increases the balance to $10,100. The following month, 1% interest is assessed on this amount, and the interest payment is $101, slightly higher than it was the previous month. If you carry that balance for the year, your effective interest rate becomes 12.68%. APY includes these small shifts in interest expenses due to compounding, while APR does not.

Here’s another way to look at it. Say you compare an investment that pays 5% per year with one that pays 5% monthly. For the first month, the APY equals 5%, the same as the APR. But for the second, the APY is 5.12%, reflecting the monthly compounding.

Given that an APR and a different APY can represent the same interest rate on a loan or financial product, lenders often emphasize the more flattering number, which is why the Truth in Savings Act of 1991 mandated both APR and APY disclosure in ads, contracts, and agreements. A bank will advertise a savings account’s APY in a large font and its corresponding APR in a smaller one, given that the former features a superficially larger number. The opposite happens when the bank acts as the lender and tries to convince its borrowers that it’s charging a low rate. A great resource for comparing both APR and APY rates on a mortgage is a mortgage calculator.

APR vs. APY Example

Let’s say that XYZ Corp. offers a credit card that levies interest of 0.06273% daily. Multiply that by 365, and that’s 22.9% per year, which is the advertised APR. Now, if you were to charge a different $1,000 item to your card every day and waited until the day after the due date (when the issuer started levying interest) to start making payments, you’d owe $1,000.6273 for each thing you bought.

To calculate the APY or effective annual interest rate—the more typical term for credit cards—add one (that represents the principal) and take that number to the power of the number of compounding periods in a year; subtract one from the result to get the percentage:

$\begin{aligned} &\text{APY} = (1 + \text{Periodic Rate} ) ^ n – 1 \\ &\textbf{where:} \\ &n = \text{Number of compounding periods per year} \\ \end{aligned}$​APY=(1+Periodic Rate)n−1where:n=Number of compounding periods per year​

In this case your APY or EAR would be 25.7%:

$\begin{aligned} &( ( 1 + .0006273 ) ^ {365} ) – 1 = .257 \\ \end{aligned}$​((1+.0006273)365)−1=.257​

If you only carry a balance on your credit card for one month’s period, you will be charged the equivalent yearly rate of 22.9%. However, if you carry that balance for the year, your effective interest rate becomes 25.7% as a result of compounding each day.

APR vs. Nominal Interest Rate vs. Daily Periodic Rate

An APR tends to be higher than a loan’s nominal interest rate. That’s because the nominal interest rate doesn’t account for any other expense accrued by the borrower. The nominal rate may be lower on your mortgage if you don’t account for closing costs, insurance, and origination fees. If you end up rolling these into your mortgage, your mortgage balance increases, as does your APR.

The daily periodic rate, on the other hand, is the interest charged on a loan’s balance on a daily basis—the APR divided by 365. Lenders and credit card providers are allowed to represent APR on a monthly basis, though, as long as the full 12-month APR is listed somewhere before the agreement is signed.

Disadvantages of Annual Percentage Rate (APR)

The APR isn’t always an accurate reflection of the total cost of borrowing. In fact, it may understate the actual cost of a loan. That’s because the calculations assume long-term repayment schedules. The costs and fees are spread too thin with APR calculations for loans that are repaid faster or have shorter repayment periods. For instance, the average annual impact of mortgage closing costs is much smaller when those costs are assumed to have been spread over 30 years instead of seven to 10 years.

APR also runs into some trouble with adjustable-rate mortgages (ARMs). Estimates always assume a constant rate of interest, and even though APR takes rate caps into consideration, the final number is still based on fixed rates. Because the interest rate on an ARM will change when the fixed-rate period is over, APR estimates can severely understate the actual borrowing costs if mortgage rates rise in the future.

Mortgage APRs may or may not include other charges, such as appraisals, titles, credit reports, applications, life insurance, attorneys and notaries, and document preparation. There are other fees that are deliberately excluded, including late fees and other one-time fees.

All this may make it difficult to compare similar products because the fees included or excluded differ from institution to institution. In order to accurately compare multiple offers, a potential borrower must determine which of these fees are included and, to be thorough, calculate APR using the nominal interest rate and other cost information.

The Bottom Line

The APR is the basic theoretical cost or benefit of money loaned or borrowed. By calculating only the simple interest without periodic compounding, the APR gives borrowers and lenders a snapshot of how much interest they are earning or paying within a certain period of time. If someone is borrowing money, such as by using a credit card or applying for a mortgage, the APR can be misleading because it only presents the base number of what they are paying without taking time into the equation. Conversely, if someone is looking at the APR on a savings account, it doesn’t illustrate the full impact of interest earned over time.

APRs are often a selling point for different financial instruments, such as mortgages or credit cards. When choosing a tool with an APR, be careful to also take into account the APY because it will prove a more accurate number for what you will pay or earn over time. Though the formula for your APR may stay the same, different financial institutions will include different fees in the principal balance. Be aware of what is included in your APR when signing any agreement.

What Is the Annual Percentage Yield (APY)?

The annual percentage yield (APY) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, compounding interest is calculated periodically and the amount is immediately added to the balance. With each period going forward, the account balance gets a little bigger, so the interest paid on the balance gets bigger as well.

Formula and Calculation of APY

APY standardizes the rate of return. It does this by stating the real percentage of growth that will be earned in compound interest assuming that the money is deposited for one year. The formula for calculating APY is:

Where:

• r = period rate 
• n = number of compounding periods

What Annual APY Can Tell You

Any investment is ultimately judged by its rate of return, whether it’s a certificate of deposit (CD), a share of stock, or a government bond. The rate of return is simply the percentage of growth in an investment over a specific period of time, usually one year. But rates of return can be difficult to compare across different investments if they have different compounding periods. One may compound daily, while another compounds quarterly or biannually.

Comparing rates of return by simply stating the percentage value of each over one year gives an inaccurate result, as it ignores the effects of compounding interest. It is critical to know how often that compounding occurs, since the more often a deposit compounds, the faster the investment grows. This is due to the fact that every time it compounds the interest earned over that period is added to the principal balance and future interest payments are calculated on that larger principal amount.

Comparing the APY on 2 Investments

Suppose you are considering whether to invest in a one-year zero-coupon bond that pays 6% upon maturity or a high-yield money market account that pays 0.5% per month with monthly compounding.

At first glance, the yields appear equal because 12 months multiplied by 0.5% equals 6%. However, when the effects of compounding are included by calculating the APY, the money market investment actually yields (1 + .005)^12 – 1 = 0.06168 = 6.17%.

APY vs. APR

APY is similar to the annual percentage rate (APR) used for loans. The APR reflects the effective percentage that the borrower will pay over a year in interest and fees for the loan. APY and APR are both standardized measures of interest rates expressed as an annualized percentage rate.

However, APY takes into account compound interest while APR does not. Furthermore, the equation for APY does not incorporate account fees, only compounding periods. That’s an important consideration for an investor, who must consider any fees that will be subtracted from an investment’s overall return.

Example of APY

If you deposited $100 for one year at 5% interest and your deposit was compounded quarterly, at the end of the year you would have $105.09. If you had been paid simple interest, you would have had $105.

The APY would be (1 + .05/4) * 4 – 1 = .05095 = 5.095%.

It pays 5% a year interest compounded quarterly, and that adds up to 5.095%. That’s not too dramatic. However, if you left that $100 for four years and it was being compounded quarterly then the amount your initial deposit would have grown to $121.99. Without compounding it would have been $120.

X = D(1 + r/n)n*y

= $100(1 + .05/4)4*4

= $100(1.21989)

= $121.99

where:

• X = Final amount
• D = Initial Deposit
• r = period rate 
• n = number of compounding periods per year
• y = number of years

Special Considerations

Compound Interest

The premise of APY is rooted in the concept of compounding or compound interest. Compound interest is the financial mechanism that allows investment returns to earn returns of their own.

Imagine investing $1,000 at 6% compounded monthly. At the start of your investment, you have $1,000.

After one month, your investment will have earned one month worth of interest at 6%. Your investment will now be worth $1,005 ($1,000 * (1 + .06/12)). At this point, we have not yet seen compounding interest.

After the second month, your investment will have earned a second month of interest at 6%. However, this interest is earned on both your initial investment as well as your $5 interest earned last month. Therefore, your return this month will be greater than last month because your investment basis will be higher. Your investment will now be worth $1,010.03 ($1,005 * (1 + .06/12)). Notice that the interest earned this second month is $5.03, different from the $5.00 from last month.

After the third month, your investment will earn interest on the $1,000, the $5.00 earned from the first month, and the $5.03 earned from the second month. This demonstrates the concept of compound interest: the monthly amount earned will continually increase as long as the APY doesn’t decrease and the investment principal is not reduced.

Variable APY vs. Fixed APY

Savings or checking accounts may have either a variable APY or fixed APY. A variable APY is one that fluctuates and changes with macroeconomic conditions, while a fixed APY does not change (or changes much less frequently). One type of APY isn’t necessarily better than the other. While locking into a fixed APY sounds appealing, consider periods when the Federal Reserve is raising rates and APYs increase each month.

Most checking, savings, and money market accounts have variable APYs, though some promotional bank accounts or bank account bonuses may have a higher fixed APY up to a specific level of deposits. For example. a bank may reward 5% APY on the first $500 deposited, then pay 1% APY on all other deposits.

APY and Risk

In general, investors are usually awarded higher yields when they take on greater risk or agree to make sacrifices. The same can be said regarding the APY of checking, saving, and certificate of deposits.

When a consumer holds money in a checking account, the consumer is asking to have their money on demand to pay for expenses. At a given notice, the consumer may need to pull out their debit card, buy groceries, and draw down their checking account. For this reason, checking accounts often have the lowest APY because there is no risk or sacrifice for the consumer.

When a consumer holds money in a savings account, the consumer may not have immediate need. The consumer may need to transfer funds to their checking account before it can be used. Alternatively, you cannot write checks from normal savings accounts. For this reason, savings accounts usually have higher APYs than checking accounts because consumers face greater limits with savings accounts.

Last, when consumers hold a certificate of deposit, the consumer is agreeing to sacrifice liquidity and access to funds in return for a higher APY. The consumer can’t use or spend the money in a CD (or they can after paying a penalty to break the CD). For this reason, the APY on a CD is highest of three as the consumer is being rewarded for sacrificing immediate access to their funds.

The Bottom Line

APY in banking is the actual rate of return you will earn on your checking or savings account. As opposed to simple interest calculations, APY considers the compounding effect of prior interest earned generating future returns. For this reason, APY will often be higher than simple interest, especially if the account compounds often.

What Is an Annual Report?

An annual report is a document that public corporations must provide annually to shareholders that describes their operations and financial conditions. The front part of the report often contains an impressive combination of graphics, photos, and an accompanying narrative, all of which chronicle the company’s activities over the past year and may also make forecasts about the future of the company. The back part of the report contains detailed financial and operational information.

Understanding Annual Reports

Annual reports became a regulatory requirement for public companies following the stock market crash of 1929 when lawmakers mandated standardized corporate financial reporting. The intent of the required annual report is to provide public disclosure of a company’s operating and financial activities over the past year. The report is typically issued to shareholders and other stakeholders who use it to evaluate the firm’s financial performance and to make investment decisions.

Typically, an annual report will contain the following sections:

In the U.S., a more detailed version of the annual report is referred to as Form 10-K and is submitted to the U.S. Securities and Exchange Commission (SEC). Companies may submit their annual reports electronically through the SEC’s EDGAR database. Reporting companies must send annual reports to their shareholders when they hold annual meetings to elect directors. Under the proxy rules, reporting companies are required to post their proxy materials, including their annual reports, on their company websites.

Special Considerations

The annual report contains key information on a company’s financial position that can be used to measure:

• A company’s ability to pay its debts as they come due
• Whether a company made a profit or loss in its previous fiscal year
• A company’s growth over a number of years
• How much of earnings are retained by a company to grow its operations
• The proportion of operational expenses to revenue generated

The annual report also determines whether the information conforms to the generally accepted accounting principles (GAAP). This confirmation will be highlighted as an “unqualified opinion” in the auditor’s report section.

Fundamental analysts also attempt to understand a company’s future direction by analyzing the details provided in its annual report.

Mutual Fund Annual Reports

In the case of mutual funds, the annual report is a required document that is made available to a fund’s shareholders on a fiscal year basis. It discloses certain aspects of a mutual fund’s operations and financial condition. In contrast to corporate annual reports, mutual fund annual reports are best described as “plain vanilla” in terms of their presentation.

A mutual fund annual report, along with a fund’s prospectus and statement of additional information, is a source of multi-year fund data and performance, which is made available to fund shareholders as well as to prospective fund investors. Unfortunately, most of the information is quantitative rather than qualitative, which addresses the mandatory accounting disclosures required of mutual funds.

All mutual funds that are registered with the SEC are required to send a full report to all shareholders every year. The report shows how well the fund fared over the fiscal year. Information that can be found in the annual report includes:

• Table, chart, or graph of holdings by category (e.g., type of security, industry sector, geographic region, credit quality, or maturity)
• Audited financial statements, including a complete or summary (top 50) list of holdings
• Condensed financial statements
• Table showing the fund’s returns for 1-, 5- and 10-year periods
• Management’s discussion of fund performance
• Management information about directors and officers, such as name, age, and tenure
• Remuneration or compensation paid to directors, officers, and others

The Bottom Line

Public companies must produce annual reports to show their current financial conditions and operations. Annual reports can be used to examine a company’s financial position and, possibly, understand what direction it will move in the future. These reports function differently for mutual funds; in this case, they are made available each fiscal year and are typically simpler.