Performance Perspectives Blog

MWRR @ subportfolio level

by | Aug 31, 2010

A brokerage client just mentioned that one of their reps wants money-weighted returns at the subportfolio level. And I was asked to contrast the advantages and disadvantages of time- versus money-weighting. Well, in one respect he came to the wrong guy, because there is no advantage to time-weighted subportfolio returns, with the only possible exception that someone might want to see how a security performed, irrespective of the flows that occurred, which might have some slight marginal value.

Who controls the flows at the subportfolio level? Well, if it’s a managed account it’s the portfolio manager…so why wouldn’t you want to use money-weighting to capture these decisions? And if it’s the client, then again, why wouldn’t you want to capture the buy and sell activity?

Money-weighting is the way to go. [full stop!]