Time Weighted Rate of Return provides a way to calculate the performance solely attributed to the portfolio manager’s actions. TWR eliminates the impact of the timing of cash flows and leaves only the effects of the market and the portfolio manager’s actions.
To calculate TWR, the performance period is broken into sub-periods. The returns of the sub-periods are calculated and then geometrically linked to derive the TWR for the performance period.
Time Weighted Formula :
RN = [EMV/(BMV + CF)] - 1;
TWR = = [(1 + RN) x (1 + RN) x … - 1] x 100
where EMV = Ending Market Value
BMV = Beginning Market Value
CF = cash flow
RN = sub period return
Example:
10/3
BMV = 4,549,863.44;
EMV = 4,629,129.14;
CF = N/A
Sub period return = - 1.74%
10/4
BMV = 4,629,129.14
EMV = 4,197,829.64
CF = (225,000.00)
RN = -4.68%
10/5
BMV = 4,197,829.64
EMV =4,278,627.55
CF = N/A
Sub period return = 1.92%
10/6
BMV = 4,278,627.55
EMV = 4,249,124.71
CF = N/A
Sub period return = -0.69%
10/7
BMV = 4,249,124.71
EMV = 4,417,916.19
CF = 81,500.00
Sub period return = 2.02%
To compute the total return over a time period, we do not simply add the sub period returns. Instead, we use the following geometrically linking calculation to arrive at the total return:
Geometrically Link
[(1 +1.74%) X (1 + –4.68%) X (1 + 1.92%) X (1 + –0.69%) X (1 + 2.02%) –1] X 100
The TWR for the period of 10/3 to 10/7 was 0.14%.
The return for multiple components (i.e. sectors or accounts) over a time period is calculated as follows: Add market values and cash flows across all components for each day, calculate a daily combined return, and then geometrically link the daily returns to get the combined return for the time period. Note that the sum of the component returns over the time period does not equal the combined return over the time period.
Additional Information
- Money Weighted Return and Time Weighted Return White Paper on our website.