Friday, November 30, 2012

Blending MWRR & TWRR

The same question has come up twice in the past week, so I thought it worth posting.

A manager manages several different accounts for the same client. Some returns are money-weighted (MWRR), some time (TWRR). The manager wishes to consolidate the accounts to present a single picture. How should they do this?

First, from what perspective are the returns being presented? That is, are you telling the client how THEY did, or how YOU, the manager did?

If the former, then I'd report everything as MWRR. In fact, I think that it might be reasonable to aggregate all the information and derive a single MWRR, although it might be better to asset weight the money-weighted returns; I'd want to spend more time on this before committing to one way or the other.

If the latter, then I think I'd asset weight the individual returns to derive the overall return. This means, asset weighting both the MWRR and the TWRR.

Can we mix MWRR and TWRR? Why not? In this context, each represents how the manager did. Asset weighting tells us overall  how the manager did.

Can we calculate MWRR for short time periods? Yes, as short as you would like.

I'll try to work up some examples.

Have some thoughts on this? Please offer your comments.

1 comment:

  1. David, I completely disagree with your stance. Taking a step back and looking at the math, TWR and MWR are completely incompatible, one is determined by removing the impact of cash flows and the other is totally reliant on both the timing and magnitude of cash flows. The reality is that an asset weighted "average" MWR is a fallacy in and of itself, much less when paired with an asset weighted TWR. Think about what would happen if you asset weighted the individual cash flows that generate each MWR - you would arrive at a new pattern of flows with potentially different timing. This is why an aggregated IRR can have a return lower (higher) than all of the constituent IRRs on a standalone basis. I am very confident that while what you are proposing, while it may seem intuitive, cannot be considered valid.


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