Quarterly Performance Reports
Understanding Your Quarterly Performance Reports: Calculating Your Own Investment Returns
Geometric vs. Arithmetic Averages
Performance Report By Period
*Click image for larger version
The Formulas – Returns Over Multiple Periods
When returns are calculated over more than one time period, they are based on the investment value at the beginning of each period. If the returns over successive time sub‐periods are, then the cumulative return or overall return over the overall time period is:
With reinvestment of all gains and losses however, the appropriate average rate of return is the geometric average rate of return over n periods, which is:
Performance Calculation Example
Below is the yearly performance for a client. As describe in the video, we will show you how to get your total return and since inception values listed on your quarterly performance report.
Total Return Calculation
Returns Over Multiple Periods
Since Inception (Annualized) Calculation
**Please note that your monthly account statements produced by Scotia Wealth Management calculate your returns using the money‐weighted methodology, while your quarterly performance reports use time‐weighted. Understand the discrepancies between the two methodologies are important. Please read the section below to understand the different return calculations.
Understanding the Difference: Time‐Weighted Versus Money‐Weighted Rates of Return
- The timing of cash deposits and withdrawals can have a substantial effect on your portfolio return
- The time‐weighted methodology does not take into consideration the effect of cash flows
- The money‐weighted methodology does take into consideration the effect of cash flows
If no cash flows are present, the return of both methodologies will be the same.
Many investors use asset performance to track their investments but there are a number of ways to calculate a portfolio’s rate of return.
While the standard in performance reporting was traditionally a time‐weighted calculation, as part of the new Client Relationship Model II (CRM2) financial industry regulations, investors now receive an annual report that includes a rate of return determined using a money‐weighted calculation.
Although both methods are accurate and correct, each calculation can produce distinct results. It is important that investors know the difference to have a more thorough understanding of how these two calculations may affect their portfolio strategy and goals.
Time‐Weighted Rate of Return (TWRR)
Time‐weighted methods do not take into account the effect of an individual’s contributions or withdrawals. Thus, TWRR eliminates the effect of cash flows into or out of a portfolio (withdrawals are added back and deposits are subtracted from the ending market value of the period). Since contributions and withdrawals are activities that can impact performance, but are not in the fund manager’s control, they are not taken into account in this calculation method. Hence, it is the ideal methodology for comparing the performance of portfolio managers and benchmarks.
Money‐Weighted Rate of Return (MWRR)
In contrast to time‐weighted, money‐weighted calculates the rate of return including the impact of contributions to, or withdrawals from, the portfolio. Since the MWRR methodology is sensitive to substantial cash inflows and outflows, it can differ substantially from the time‐weighted rate of return when cash flows occur during the same period being measured.
The table below compares money‐weighted and time‐weighted outcomes for typical market scenarios.
Why do the new account statements use the money-weighted calculation?
The reason why the MWRR is presented on the new account statements is the Canadian securities regulators see money-weighted as the most appropriate way to measure individual portfolio returns. This is due to the factors we described above.
While time-weighted return calculations are useful for assessing the performance of your investment managers relative to market benchmarks, money-weighted calculations help you assess your personal performance relative to your individual financial plans and projections.
At Verus Financial
At Verus we use the TWRR to calculate our client performance numbers on their Quarterly Performance reports. Since we pride ourselves on delivering superior risk adjusted returns it is imperative for client to be able to compare their own performance against other managers and benchmarks. As explain above, the impact on cash flows on the DWRR hinders our ability to compare performance results. Hence why we use the TWRR methodology on our Quarterly Performance Reports.