Performance Perspectives Blog
Time-weighting vs. Money-weighting … a never ceasing issue
Carl Bacon and I will be battling one another tomorrow at the second day of PMAR Europe I on the subject of time- vs. money-weighting. Carl and I enjoy these debates and have engaged in them several times.
This evening I was speaking with a client who mentioned that she has tried to get her management to accept money-weighting, but to no avail. It occurred to me that she needs to get past the labels: just show the numbers.
Use examples to demonstrate the difference without using labels. We’ll discuss three:
Our first example is somewhat classic: we lose money but have a positive return; but, we can also see a negative return. The second shows where our gain/loss is zero but we show a huge return in one case and a zero return in the second. And the third shows us making money but having a negative return in one case and a positive in the other.
And so ask your client what return makes sense to them if we’re reporting on how THEIR PORTFOLIO did; not how the manager performed. If the client offers anything but ROR #2 in all cases, we have a problem. And, of course, ROR #2 is MWRR (ROR #1 is TWRR): ‘nough said.