The time-weighted rate of return (TWR) measures a portfolio's compound growth rate while excluding the impact of deposits and withdrawals. It breaks the investment period into smaller segments, evaluates performance for each, and then links them together to provide an accurate reflection of the portfolio manager's decisions.

This is a highly useful way to assess fund managers' performance, whether against other funds, benchmark indexes, or even different types of investments.

How to Calculate TWR

There are several simple steps to calculate the TWR:

• Step 1: Identify the Sub-Periods. A sub-period is the interval during which each deposit or withdrawal happens.
• Step 2: Calculate the Sub-Period Returns. The return is the percentage change of the value of the portfolio before any new 澳洲幸运5官方开奖结果体彩网:cash flows. It is "HP" in the formula below.
• Step 3: Calculate the Geometric Mean of All Sub-Periods. Link the returns across all sub-periods as shown in the first line of the TWR formula below.

Formula for TWR

U๊se this formula to determine the compounded rate of growth o꧟f your portfolio holdings.

$\begin{aligned}&TWR = \left [(1 + HP_{1})\times(1 + HP_{2})\times\dots\times(1 + HP_{n}) \right ] - 1\\&\textbf{where:}\\&TWR = \text{ Time-weighted return}\\&n = \text{ Number of sub-periods}\\&HP =\ \dfrac{\text{End Value} - (\text{Initial Value} + \text{Cash Flow})}{(\text{Initial Value} + \text{Cash Flow})}\\&HP_{n} = \text{ Return for sub-period }n\end{aligned}$​TWR=[(1+HP1​)×(1+HP2​)×⋯×(1+HPn​)]−1where:TWR= Time-weighted returnn= Number of sub-periodsHP= (Initial Value+Cash Flow)End Value−(Initial Value+Cash Flow)​HPn​= Return for sub-period n​

Example of TWR

Assume there are two mutual funds: Fund A and Fund B. At the beginning of one year, let's say they both have $1 million in 澳洲幸运5官方开奖结果体彩网:assets under management. The table below then provides the change in the values of the funds as well as their cash flows. (To simplify, we'll say new investments and withdrawals are only allowed after the close of trade on 🌊the last day of each quarter.)

The end-Q4 value represen꧂ts 𝐆their assets under management at the end of the year. You can see that at the end of the fourth quarter, Fund A had $1.9 million in assets under management, while Fund B had $1.85 million. So on the surface, Fund A returned 90% and Fund A returned 85%.

But, of course, it's not that simple. Let's break it down:

For Portfolio A:

Initial value: $1 million

First quarter: Rises to $1.2 million, a 20% return, before addi🌞ng $400,000 in investments, bringing the total value to $1.6 million.

Second quarter: Starting value of $1.6 million rises to $1.65 million, a 3.1% return, followed by $200,000 in withdrawals, bringing the total ♎va♈lue to $1.45 million.

Third quarter: Starting balance of $1.45 million rises to ജ$1.5 million, an increase of 3.4%, foജllowed by $200,000 in inflows, bringing the total value to $1.7 million.

Fourth quarter: Initial balance of $1.7 m🃏illion rises to $1.9 million, up 12%, followed by $300,000 💝in inflows. This brings the year-end balance to $1.9 million.

Therefore, Portfolio A's TWR = [(1.2)*(1.31)*(1.34)]*(1.12) - 1 = 43%.

For Portfolio B:

Initial value: $1 million

First quarter: Rises to $1.15 million, a 15% increase. Receives $50,000 in incoming cash flows, bringing the totalඣ value to $1.2 million.

Second quarter: With a starting value of $1.2 million, the fund rise🌳s to $1.4 million, an increase of 17%. It takes in another $50,000 in investments, bringing its total value to $1.45 million.

Third quarter: It rises from $1.45 million to $1.6 million, a return o🍬f 10%, followed by $100,000 in withdrawals, leaving a value of $1.5 million.

Fourth quarter: With a starting value of $1.5 million, it rises to ไ$1.8 million, a return of 20%. It takes in $50,000 in investments, bringing💖 its year-end value to $1.85 million.

Thus Portfolio B's TWR = [(1.15)*(1.17)*(1.1)]*(1.2) - 1 = 77%

So Portfolio B clearly outperformed Portfolio A, even though it ended up with a slightly lower year-end v🍬alue. Both calculations eliminated the effect of cash flows, providing a more useful comparison of 🎃returns.

How to Use TWR

TWR is especially useful for evaluating 澳洲幸运5官方开奖结果体彩网:fund manager performance because it focuses on investment decisions rather than investor-driven cash movements. Furthermore, it ensures that returns are measured consistently regardless of when contributions or withdrawals occur. Indeed, investors and analysts also use TWR for benchmarking portfolios against market indices, helping to figure out whether an investment strategy is outperforming or lagging behind broader market trends.

Also, its compound structure enables investors to estimate future long-term portfolio growth. Nonetheless, users need to be wary of TWR's limitations. The metric does not reflect the actual dollar return experienced via the portfolio. For that, the 澳洲幸运5官方开奖结果体彩网:Money-Weighted Return is a better solution.

The Bottom Line

Overall, TWR evaluates investment performance, ensuring an accurate compar🉐ison of portfolio returns by removing the impact of external cash flows. Whether used to assess fund managers, investment strategies, or to benchmark against market indice꧒s, TWR gives a clear view of portfolio growth over time.