Performance Perspectives

Volume 18 – Issue 9 – September 2022

When you think about it, what does the asset owner’s overall Time-Weighted Return mean?

For quite some time I have preached that the return should answer a question. To
determine, for example, whether to use a time- or money-weighted return, I’ll
ask “what question are you asking?”

For example, if you want to know your own performance, as an investor, money-weighting is what you want. Vanguard and other mutual fund companies now provide investors with the ability to see their
”personal rate of return.“ This is a money-weighted return that takes cash flows into attention.

If you ask ”how did my manager perform?,” I’d want to know what that manager was
investing in.

If it was public equities or bonds, then the time-weighted return would apply, as we do not want cash flows to influence the results (since the manager does not control the flows, the investor does). On the
other hand, if it’s a private equity manager, we’d want to use the internal rate of return, the ”true“ money-weighted return, because we want to capture the impact of flows, since in this case the manager controls the flows.

If an asset owner only invests in public equities and bonds, then the time-weighted return would tell them how well their managers performed, overall, collectively, in aggregate. This would, I believe, have some value. They can also use the TWR for each manager individually, to see how they did.

However, many, if not most, public pension funds, as well as many other asset owners, now have an allocation to private equity. We would never evaluate an individual private equity manager using the time-weighted return, because it would remove the impact of their cash flow decisions, and the result would have
zero meaning: it answers no question at all: zilch, nada.

And so, if we combine the asset owners private equity funds with their publicly
traded assets, what does the time-weighted return tell us?

Well, that’s quite simple, it answers the question ”how did ??? perform.”
That is, it doesn’t answer any question whatsoever. It has zero meaning. It means

And yet, the Global Investment Performance Standards (GIPS®) requires asset
owners who choose to comply to report the time-weighted return for their
composites. Why? Well, the answer, I think, is pretty simple: because that’s what
GIPS always requires. Until the 2020 version, it seemed to generally abhor the
use of the IRR, limiting its use quite a bit. The Standards recommend that asset
owners report the IRR (sorry, money-weighting, since the rules have [sadly]
broadened what is allowed).

Asset owners are used to reporting the time-weighted return; they’ve been doing
it for decades. Despite the United States Government Accounting Standards
Board (GASB) requiring the IRR on an annual basis, most asset owners seem to
like the time-weighted return.

But I believe that’s just a habit that has taken root. More understanding of what
the returns deliver, what they actually mean, is necessary. If someone can provide the answer
to what the fund’s TWR means, what question it actually answers, that would be great. I’m ”all ears.“ Please feel free to share your thoughts.

More to follow on “best practices.”

GIPS Verification TSG

What question are you asking?

– David D. Spaulding, DPS, CIPM

Additional Resources on Time- and Money-Weighted Returns

Blog posts:

Making sense out of nonsensical returns

Author: David D. Spaulding, DPS, CIPM

Sometimes, the labels don’t matter

Author: David D. Spaulding, DPS, CIPM

Why is it called time-weighted return?

Author: David D. Spaulding, DPS, CIPM

Articles from The Journal of Performance Measurement:

Using Brinson Attribution to Explain the Differences Between Time-Weighted (TWR) and Money-Weighted (IRR) Returns

Author: Joe D’Alessandro, NCREIF

A Primer on Time-Weighted and Dollar-Weighted Returns

Author: Steve J. Lerit

GIPS Compliance TSG

Are you getting the most out of your claim of GIPS compliance?

A webinar with eVestment on “Incorporating GIPS Into Your Sales and Marketing”.


Why GIPS is important in manager selection and increasing AUM


What is the significance of updating industry databases with GIPS Compliance information


What are the key opportunities available to leverage compliance with GIPS into the firm's sales and marketing efforts


What role the sales and marketing team(s) can play in the compliance effort


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