Performance Perspectives Blog

Money-weighted Rate of Return: a calculation to consider

by | Nov 12, 2015

MW ROROur friend and colleague, Dax Johnson, of State Street, posted a link to a page on LinkedIn that, in turn, takes you to a white paper they wrote, titled “Money-Weighted Rate of Return, a Calculation to Consider.”

As one who has been championing the use of money-weighting for well over a decade, this is a welcome addition to our cause.

We find the following: “’How did we do?’ It’s one of the first questions most asset owners ask.”

NOT, “how did the manager do?,” but rather, “how did WE do.” WE, the investor. WE, the one who is controlling the cash flows.

The initial page continues: “A money-weighted rate of return (MWRR) can complement TWRR by providing a bigger-picture view and accounting for post-crisis reporting complexities. By understanding the practical application and benefits of MWRR, practitioners can apply them to help answer their most important questions about performance.”

They ask us to “reconsider our approach.” YES, YES, YES!!!

The Money-weighted Rate of Return should dominate how you measure performance

Sadly, time-weighting has been dominating the industry for so long, that too many folks think it’s the only way to measure performance. But it’s not. In fact, money-weighting should DOMINATE performance.

Please visit State Street’s link and get the paper. Read it and reflect upon what it suggests.

Given State Street’s stature, hopefully they’ll be successful in getting more folks to embrace money-weighting.

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