Turnover Rates

Turnover Rates (also known as 'Portfolio Turnover Rate') measure how frequently the assets within a fund or portfolio are bought and sold by its managers. Think of it as the “busyness” of your fund manager. A turnover rate of 100% means that, on average, the fund has replaced its entire portfolio over the past year. A 25% rate means only a quarter of the holdings were changed. For a value investor, this number is a critical health check. It tells you whether your manager is acting like a long-term business owner, carefully selecting companies to hold for years, or like a hyperactive trader, jumping in and out of stocks. High turnover often signals a short-term, speculative mindset and can rack up hidden costs that silently erode your returns. A low turnover rate, by contrast, typically reflects a patient, disciplined strategy focused on the long-term intrinsic value of businesses—the very heart of the value investing philosophy pioneered by figures like Benjamin Graham.

The calculation is simpler than it sounds. Fund managers take the total value of new securities purchased or the total value of securities sold—whichever is less—over a one-year period. They then divide that number by the fund's average AUM for that same year. The formula is: Turnover Rate = (Lesser of Purchases or Sales) / (Average AUM) Let's imagine the “Capipedia Value Fund” has an average AUM of €100 million for the year.

1. During the year, the manager buys €30 million worth of new stocks.
2. They also sell €20 million worth of existing stocks.

Since the value of sales (€20 million) is less than the value of purchases (€30 million), we use the sales figure. The turnover rate would be: €20 million / €100 million = 0.20, or 20%. This is a lovely, low number that would make Warren Buffett nod in approval.

This metric isn't just financial trivia; it's a powerful indicator of a fund's philosophy and potential performance. For a value investor, a low turnover rate is a beautiful thing for two big reasons: costs and mindset.

A fund manager who trades frequently is like a driver who constantly slams on the gas and the brakes—it’s incredibly inefficient and expensive. High turnover directly hurts your returns through:

• Transaction Costs: Every time a stock is bought or sold, the fund pays fees. These include brokerage fees and the often-overlooked bid-ask spread (the tiny difference between the buying and selling price). These “frictional costs” might seem small on any single trade, but for a fund trading millions, they add up to a significant drag on performance.
• Tax Inefficiency: This is the big one. When a fund sells a winning stock, it realizes a profit, which can create a capital gains tax liability. This liability is then passed on to you, the investor, even if you haven't sold any of your shares in the fund. A low-turnover fund, by contrast, defers these taxes for years, allowing your money to compound more powerfully. It’s the difference between letting your garden grow and constantly digging up your plants to see if the roots are healthy.

Beyond the raw numbers, the turnover rate offers a peek inside the manager's head.

1. Low Turnover (typically under 30%): This suggests a manager with patience and conviction. They've done their homework, bought what they believe are undervalued businesses, and are prepared to hold them for the long term, allowing their value thesis to play out. This is the classic value investing approach: you are an owner of a business, not a renter of a stock.
2. High Turnover (often over 100%): This points to a manager who might be a market timer, a momentum chaser, or simply someone who lacks conviction. They may be reacting to short-term news or market “noise” rather than focusing on the fundamental, long-term value of a company. This frenetic activity is often a sign of speculation, not investment.

While value investors are right to be skeptical of high turnover, it's not always a sign of a flawed strategy. Certain specialized approaches, such as some quantitative strategies or funds focused on distressed debt, might require more frequent trading as part of their core discipline. A manager might also have a high turnover rate in a single year due to a change in management or a significant shift in their economic outlook. However, the key is consistency. If a fund consistently posts high turnover year after year without delivering superior, after-cost, after-tax returns, it’s a major red flag. For the vast majority of equity funds, high turnover is a costly habit that benefits the brokers far more than it benefits the end investor.

Don't just glance at a fund's headline performance; dig a little deeper and check its turnover rate. It’s one of the most revealing stats you can find in a fund's prospectus or annual report. Think of it as a “patience score.” A low score (under 20-30%) often points to a disciplined, cost-conscious, and tax-efficient manager whose interests are aligned with yours. A high score (anything approaching 100% or more) should make you pause and ask: “Who is all this activity really benefiting?” In the world of value investing, the patient tortoise almost always beats the hyperactive hare. Choosing funds with low turnover is one of the easiest ways to stack the odds in your favor.