TWR and MWR

Headline return is not one number. TrackRecords reports time-weighted return (TWR) and money-weighted return (MWR) from the same book, so a trustee, a CIO and a client can look at the same period without mixing two questions:

• TWR answers “how did the strategy perform?”, stripping out the size and timing of client inflows and outflows.
• MWR answers “what return did this capital actually earn?”, with large flows counting more than small ones.

Both need a transaction-based book (or an official NAV series). Holdings snapshots on a date are enough for structure, limits and risk; they do not, by themselves, produce a time-weighted return. See the reporting standard.

TWR

The period is split into sub-periods between external cash movements (and, in the daily engine, into calendar days). For each sub-period:

r = (value_end − net_external_flow) / value_start − 1

The period TWR is the geometric product:

TWR = (1 + r1) × (1 + r2) × … × (1 + rN) − 1

That is the GIPS-style time-weighted chain: a contribution paid in on the last day does not inflate the manager’s return, and a withdrawal does not hide it.

You can drive the same chain from the nav section of the reporting file (NAV and net external flows). Prefer a point on every day. Minimum: start, end, and every flow date.

Total return vs capital return

• TR (total return) reinvests coupons, dividends and similar cash into the result.
• CP (capital return) follows price (and FX on principal) only, without coupon and dividend income.

The two views use the same holdings and the same dates. Switching TR/CP does not reload the book.

Gross and net of fees

Management, success and administrative fees are instruments in the book (asset classes “Manager remuneration” and “Administrative and other expenses”), not a footnote. Gross TWR keeps those lines out of the return; net TWR includes them. Accrual vs cash follows the reporting standard.

MWR

MWR is the return on average invested capital (Modified Dietz-style), not a geometric chain:

income = end_value − start_value − net_external_flows

MWR = income / average invested capital

Average invested capital weights each external flow by how long it stayed in the book. A large subscription late in the year barely affects MWR; the same cash on day one does.

Income is also split into mark-to-market, FX, coupons and dividends (in the portfolio currency). The four parts add up to total income.

At instrument level the same identity holds: MWR_i = income_i / AIC_i. A high MWR on a small, short-lived position is not comparable to a modest MWR on a core holding.

When to use which

TWR of a mixed book compared only with an equity index is usually the wrong test. Build a benchmark that matches the policy weights, then compare TWR to TWR.

Related: Contribution, Attribution, Custom benchmarks, Reporting standard.