Inside the Return – Series 2

Published on Oct 10, 2019.

We have talked of different return measures that an investor come across in the course of investing in the Series-I of Inside the Return. Out of all, two return measures are widely used to evaluate the performance of the investment service providers – Money Weighted Return (MWR) and Time Weighted Return (TWR). There are many categories of investment service providers, an investor may have exposure to one or more than one investment service providers in his portfolio for the different categories of investments. In this series, we talk about which type of return metric is applicable to appraise which type of investment service provider, this will help an investor to look for the right number while evaluating the performance of an investment manager from the prospecting to appraisal stage –

Mutual Funds – Mutual Funds essentially report the TWR. The returns of a Mutual Fund scheme can simply be calculated by the price of its unit called NAV (Net Asset Value). NAV is a price of per unit and is declared daily after taking account of the daily subscription and withdrawals. The return calculated is based on NAV per unit and is not thus influenced by money weights. An investor should look for Annualized Return and Calendar Year Return to evaluate the scheme’s performance.

Portfolio Management Scheme (PMS) – PMS do not have provisions of unit NAV reporting. PMS return are subject to money weights. A simple reporting of MWR and IRR in a product marketing material can present a highly distorted return picture. The investors must look for Time Weighted Return to understand the true performance of PMS portfolio manager. The right place to look for TWR of a PMS scheme is Disclosure Document. Marketing material may not report TWR whilst Disclosure Document is a compliance document and generally have information about TWR however it is not mandatory as of now to report TWR by the Portfolio Manager under regulatory guidelines.

Investment Advisers – One of the prime responsibilities of an investment adviser is to advice the investor when to overweight or underweight on a particular asset class. His true performance can be measured by looking at MWR or IRR. If he is successful, he should outperform the underlying asset/benchmark by moving higher money weight in favorable time period and by reducing money weight during unfavorable time period or he should be able to deliver the target return being benchmark agnostic which again can simply be calculated using MWR (IRR) methodology.

Private Equity/Venture Capital Funds – Most of the Private Equity and Venture Capital Funds maintains the control over timing and amount of cash flow into the scheme. They typically operate under arrangements that permit them to call capital from investors at manager’s discretion and ultimately to determine when the original capital, and any earnings on the capital, will be returned to investor. Because of such arrangement, MWR is the right measure of a PE/VC scheme performance.

Sachin Kapoor, CFA