Investment Performamce Measurement Terminology

Investment Performamce Measurement Terminology

The following terminology is applied to the definitions in the Investment Performamce Measurement category.

Terms

A time weighted rate of return (twr) is a method of calculating the return over a period which reduces the impact of external cash flows. Any comparison between portfolios should be done on a time weighted return basis. For time weighted return for a total period to be measured is broken into many sub-periods, which can cover any length of time and need not be uniform. The time weighted rates of return for the sub-periods are them linked to calculate to the time weighted rate of return for the total period.

Also referred to as the internal rate of return (irr) or the dollar weighted rate of return. This is used to measure the performance of a fund taking into account external cash flows. This method is useful when looking at the return of a portfolio in isolation, however there are limitations in using money weighted rates of return for any comparisons against other portfloiios, or against any benchmark. The money weighted rate of return factors in all cash flows, including contributions and withdrawals. The methodology will therefore tend to place a greater weight on the performance in periods when the portfolio size is highest (hence the term “money weighted”).

The transfer of value into or out of a portfolio. By convention, an inflow is considered as positive, and an outflow as negative flow.

When considering a total portfolio, an external cash flow is a flow of cash and/or securities (capital additions or withdrawals) that is investor initiated. Examples of external cash flow are contributions and withdrawals. Expense payments are also considered as external cash flow.

Cash inflow are positive (eg: 100 10)
Cash outflow are negative (eg: -10 -12)
Cash inflow and outflow (eg: 100 10 -10 -12)

The total market value of the assets in the portfolio including any accrued income.