Many may have heard of Time Weighted and Money Weighted. There continues to be confusion on what metric to use in performance measure. For retailers and typically investors I dare to say it has to be Money-weighted. I just read an article and reinforce my understanding that most users should only use Money-Weighted.
Time weighted by funds usage to me is quite misleading on performance over time if you read further down. Fortunately, when we says money weighted we are referring to XIRR in Excel.
Here's the table i extract from the article. (link )
Both methods have $1M injected by 2 parcels. Initial and mid June. Both losses 200K in the end. Logically performance should be negative at the end of the period. However TWR registered 146% good performance whereas XIRR registered -30%. Enough Said. Stick to XIRR (MWR) please.
If sales people tell you their fund performance is good, be wary. They could be using TWR. Is not intuitive for normal people but I wouldn't say they are wrong. LOL.
Cory
20190108
Cory,
ReplyDeleteIts the industry standard for professional money managers to use Time-Weighted Returns, but you are advocating amateurs should stick with Money-Weighted Returns ;)
I invested $1 mllion in the course of the year. Lost $200K, and my loss for the year is is not -20%?
Using Money-Weighted Return, its more "accurate" to say my loss is -30.02% (Don't forget the 2 decimal places!)
LOL!
Notice if we count in dollars and cents, no matter what statistical or mathematical manipulation magic we do, -$200K is still -$200K :)
SMOL, if the world is just one buy trade and one sell trade, life will be much easier. In real world, constant cash injection at different time, sell trade at different time, things become complicated. Portfolio size is different too. Sometimes life is about choosing the lesser devil of the two. Did I say something about United States ? ;)
DeleteHi Cory, if the two injections were done by two different investors, the first investor would still have a total return of 146% and he would likely give you a pat on your back at year end but the second investor would be quite mad with you for losing his money. That is why professional money managers use TWR. But MWR makes perfect sense from the perspective of a single investor. Just my two cents. Cheers.
ReplyDeleteI don't think it this way but correct me if I am wrong. The scenario where the first investor (assuming true investor) will be really happy is if they sell it 1st Jun to realize the gain of 550%. What we like to focus is how the product is promoted. I think professional money managers will promote their product with the first part 6 months score to attract the much larger trance of investors.
DeleteWhen we buy Unit Trust for example, we want to know the manager performance. Depending what you are marketed, you have different illusion imprinted on our mind.
Should it be 550%, 146% or -30% ? Remember, the point of time you buy AFFECTS you significantly. But manager performance do not measure up to this specific timeline.
If you know that the manager performance strong throughout the year 550% vs -30%, your impression of the manager can be vastly different this your decision of investment on them.