I got an e-mail from a retail client this week. That is, a retail client, whose rep works for one of our brokerage clients. This hadn't happened before.This individual's rep had passed him one of the issues of our newsletter, to explain how they calculate their returns. This apparently didn't satisfy the end client, who sought clarity from me.
He indicated that he found the way returns are calculated by his broker too confusing, and advocated a "money weighted" approach: music to my ears! He went to the trouble to show me the IRR formula, which I thought was kind of funny. In my response I indicated that I've often commented favorably about the IRR and money-weighting, and suggested he review other issues of the newsletter (which is no easy task, given that we're now in our 7th year, and so have quite a lot of issues out there (though we do provide summaries of each on the website)).
I have found that when you show clients (institutional or retail) money-weighted returns, they feel that the returns are much more meaningful. Granted, time-weighting has its place, and shouldn't be replaced by money-weighting to represent how the manager did (save for private equity managers). Our crusade to get more firms to adopt money-weighting continues to gain new followers.
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If a firm could calculate using daily time weighted, then it shouldn't be a problem providing an IRR. However, when you present two returns to a client or a Portfolio Managers\, they normally would question why the returns are different and which one is correct return? When will people learn that there is no correct return calculation? Is there a solution to this issue?
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