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How returns are calculated: Time-weighted returns (TWR) vs. money-weighted returns (MWR)

By ATB Investment Management Inc. 4 June 2020 3 min read

There are two industry standards for calculating portfolio performance that investors need to be aware of: time-weighted returns (TWR) and money-weighted returns (MWR). These names probably sound like a part of the jargon found in the fine print of your statement—and this is exactly what it is.

Rolled out across Canada in 2017 by the Investment Industry Regulatory Organization of Canada (IIROC) now known as the Canadian Investment Regulatory Organization (CIRO), the Client Relationship Model - Phase Two (CRM2) regulation requires statement returns to represent money-weighted calculations, as it is believed that they are more relevant to individual investors than time-weighted returns are. Prior to 2017, investors saw time-weighted returns only on their statements.

But despite being financial jargon, it is still important to understand the difference between the two (and to be able to search it out in the fine print for more information) because the method used defines the comparability of two sets of returns.


The difference between time-weighted returns and money-weighted returns

The main difference between how time-weighted and money-weighted returns are calculated is how they consider the amount and timing of cash flows. When we say cash flows, we are referring to any money that enters or leaves your account. This includes deposits, withdrawals, fees, and transfers.


Money-weighted returns (MWR)

Money-weighted return calculations include the amount and timing of these cash flows and are sometimes referred to as “personal rates of return” because they are personal to the individual investor. These calculations include the timing and amount of your deposits and withdrawals (including fees) and that is what makes them particularly appropriate for client statements.

When there are large inflows or outflows from your portfolio, especially during times of market volatility, the money-weighted return will differ significantly from the time-weighted return. Likewise, when there is more invested in your account and the value is appreciating, your returns will look better than if there was less money in your account.

Money-weighted returns tell us the actual return that an individual investor has experienced and is what investors should look to when determining if their long-term target of their financial plan is being met. With that said, the comparability of these returns to other portfolios and individual funds is minimal.

Since these money-weighted returns are so specific to each investor's account activity (contributions, withdrawals, switches, fees), they are not directly comparable to the returns of other portfolios or individual mutual funds. So, if you are considering making a change to your mutual fund investments, you would not want to compare your long-term MWR to the return of the mutual fund. Mutual fund returns are presented as time-weighted calculations, which allows for comparability between funds.


Time-weighted returns

Time-weighted returns measure the compound rate of growth and assume one dollar is invested at the inception of the account and there have not been any withdrawals or additions to the portfolio. As most investors make contributions or withdrawals from their investment portfolio over time, this method of calculation is not especially relevant to most individual investors.

It is, however, relevant to mutual fund returns and is the industry standard for reporting the fund returns that you see on fund company websites and regulatory documents outside of your own account statements. This is because time-weighted returns avoid the impact of inflows and outflows over time and keep funds fairly comparable.

If there are no cash flows in or out of the portfolio, the returns will be the same no matter which calculation method is used.


Knowing what is included in the calculation of your return is important for comparability, but remembering that there is more to your investments than the compatibility of returns is crucial.

Assessment of performance should always be done with an appropriate benchmark and the calculation methodology of both your portfolio and the benchmark of both should be kept in mind. For example, if you are considering the time-weighted return of a mutual fund with embedded fees to a broad market index, the latter does not reflect the cost of investing whether that is fund management or advisory fees. These fees will always reduce returns over time and are reflected in money-weighted calculations.


Reach out to our ATB Wealth experts if you have any questions about understanding your investing returns. 

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