Thursday, April 15, 2010
Why measure a pension fund's overall time-weighted return?
It would be unfair to compare the managers to one another, since they're investing in different asset classes, market segments, etc. By virtue of their individual market they can have vastly different returns. If small cap value stocks are in favor while large cap growth isn't, the mere fact that the SCV manager outperformed the LCG says nothing in particular. Wouldn't it be better to show how the fund benefited from each manager? This would be a money-weighted report.
And what does the overall return tell us: the one that says how the fund did, in general, from a TWRR perspective? Not much, I'm sorry to say. It basically says how the aggregation of managers performed from a time-weighted perspective. Whoopee! Wouldn't it be better to communicate how the fund did overall? For that, we would need money-weighted returns, yes?
More to follow.