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Time Weighted Returns

Time Weighted Return (TWR) is a means of measuring portfolio performance over time, independent of the amount invested or withdrawn.

The Unit Valuation System is an example of a Time Weighted Return system, whereas the Internal Rate of Return is a Money Weighted measure of performance.

Time Weighted Return metrics enable you to compare the value of your portfolio over a selected time frame i.e. the emphasis is on the return achieved over a period of time. When using Time Weighted Return metrics such as the Unit Valuation System, it is important to note that the timing of when cash is deposited or withdrawn is not considered; you are simply concerned with the amount of capital under investment and the overall return for the selected time frame.

For example, let us consider the application of the Unit Valuation System Time Weighted Metric to the following example:

  • on the 1st of May 2007 your portfolio is still worth £10,000 i.e. it has not increased or decreased in value. As the portfolio value has not changed, the unit value is still £1 i.e. the portfolio value divided by the number of units in circulation, which is £10,000 divided by 10,000 units. You now decide to increase your investment in your portfolio by depositing another £5,000 into your trading account, and in doing so you increase your portfolio value to £15,000. Using the Unit Valuation System, the number of units that you now own is increased from 10,000 to 15,000 i.e. you have purchased £5,000 worth of units at a price of £1 per unit, which results in your total portfolio value (aka Net Asset Value) increasing to £15,000 and the number of units in circulation increasing to 15,000. After the cash has been deposited and the new units issued, the unit value remains at £1 per unit i.e. £15,000 divided by 15,000 units.
  • on the 1st of June 2007 your portfolio has doubled in value from the previous month and is now worth £30,000. As a result of the increase in the value of the portfolio, the unit value is now £2 i.e. the Portfolio value of £30,000 divided by the number of units in circulation, which is 15,000 units.

If you compare the unit value on the 1st of June 2007, to the unit value on the 1st of May, the associated rate of return is 100% i.e. your unit value has doubled. If you compare the unit value on the 1st of June 2007, to the unit value on the 1st of April 2007, the associated rate of return is also 100% and the cash deposited on the 1st of May did not affect the rate or return. It is important to note that the rate of return on the 1st of June is exactly the same when compared to the 1st of April and the 1st of May i.e. the time that has elapsed from the initial investment is not factored into the Time Weighted Rate of Return. It is also important to note that the timing of the deposit of additional cash into your trading account, did not impact your rate or return.

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