If you’re a frequent reader of my blog and/or our firm’s newsletter, you know of my passion for money-weighting, especially when it comes to subportfolio returns.

I’m teaching classes this week for a client and when we discussed subportfolio returns and my preference for money-weighting, a student asked what the GIPS(R) (Global Investment Performance Standards) rules were regarding this topic. In general, GIPS is silent when it comes to subportfolio returns; the one exception is for carve-outs. But even here, there is no explicit requirement, but it’s worth considering how we should handle them.

While I generally favor using MWRR for subportfolio returns, in this (possibly only) case, I’d argue that TWRR is what we should do. And why is this? Well, think about what a carve-out is supposed to be doing: we’re taking, for example, the equity portion of a balanced portfolio and putting it into an equity composite. If there are accounts in the composite which are only invested in equities, their returns are measured using TWRR. And, the carved-out portion is supposed to represent what would have happened had the assets been managed separately, and not as part of a balanced portfolio. Therefore, TWRR makes sense.