Time-weighted return
The compound growth of one unit over the period, linking returns between external cash flows so their timing and size have no effect. The standard measure for a manager who does not control the flows.
Where you will meet it
Time-weighted return appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Contrast money-weighted with time-weighted rates of return
“A time-weighted return chains the returns of each sub-period and is unaffected by those flows.”
- Differentiate the internal rate of return and time-weighted return when applied to alternatives
“Time-weighted return measures the performance of a strategy independently of when money entered or left, which is why it is the standard for evaluating a manager of a fund the investor can enter and exit freely.”
- Explain why private-market results cannot be read like listed-market returns, and compute and interpret the paid-in multiples DPI, RVPI and TVPI and when each is useful
“The GP controls when capital is called and returned, so private funds report money-weighted IRRs and multiples, not time-weighted returns, and comparing them with an index needs a public market equivalent (PME).”
- Judge whether a private client's investment programme is working, using performance reports and periodic reviews
“Time-weighted return is the right tool for judging the manager, while money-weighted return reflects the client's own experience including the timing of contributions and withdrawals.”
Practise it
Practise time-weighted return until it is automatic: questions that explain every wrong option.
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