Performance reporting in the PMS industry had no standardized reporting till SEBI mandated managers to only report TWRR. (Time Weighted Rate of Return).
TWRR measures skill of a fund manager – TWRR does not care about quantum of money invested, only the return earned over the time period money was invested. It is calculated by multiplying returns over each time period money is invested and dividing it by the total time period. Alternatively, one can calculate this by assuming units are being issued at prevailing prices and calculating how the NAV of each units has evolved (MF method).
If you see the calculations below, if a client topped up an account by 2 Cr during the Covid bottom, or topped up by 10 Cr, the TWRR was the same.
TWRR is the right metric to compare performance as long as the time dimension across managers is common.
- TWRR of a manager over 1 year vs another over 5 years is comparing apples to oranges.
- You can compare TWRR across Managers even if you topped up some and not the others, as long as the time dimension is the same. Hence, SEBI mandates reporting TWRR.
XIRR (Extended Internal Rate of Return) measures returns earned. XIRR is impacted both by the quantum of money invested across a client and the time when it was invested.
If you see the calculations above, a top-up of 2 Cr vs 10 Cr during Covid would have resulted in the same TWRR but different XIRRs. XIRR is not useful as a comparison across fund managers unless all have got the same amount of money at the same time.
So which performance measure to use? It depends on Objective
- TWRR is the right metric for relative performance benchmarking across Managers
- XIRR is the right metric to understand what your actual returns are. If you are on a semi variable / variable fee structure with us, performance fee is calculated basis XIRR
- XIRR = TWRR if no top ups or withdrawals are made.