When to Use Time-Weighted Return (TWR) vs. Money-Weighted Return (MWR)

Sean P. Gilligan, CFA, CPA, CIPM

December 29, 2020

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There are two types of returns investment managers use to report the performance of their strategies: Time-Weighted Returns (“TWR”) and Money-Weighted Returns (“MWR”). The most common MWR is the Internal Rate of Return (“IRR”). Here we take a look at both TWR and MWR to help you understand when each method should be used and why.

The key difference between the two methods is that:

  • Time-Weighted Returns REMOVE the effect of the timing and amount of external cash flows.
  • Money-Weighted Returns INCLUDE the effect of the timing and amount of external cash flows.

Because of this, money-weighted returns represent the actual return received by the investor, while time-weighted returns represent the return achieved by the investment manager after removing the effect of external cash flows.

But when is it appropriate to use one over the other? Because MWRs reflect the investor’s actual returns, it may seem like the best method to use in all situations. However, if the purpose of reviewing the performance is to evaluate the portfolio manager’s discretionary management, we do not want decisions made by the investor to affect the results. The most appropriate methodology to use to evaluate the portfolio manager depends on who controls the external cash flows (contributions and withdrawals) from the portfolio.

Investor-Driven Cash Flows

When the timing and amount of external cash flows are controlled by the investor, investor-driven decisions impact the return. To present returns that allow investors to evaluate a manager’s discretionary management, TWR should be utilized to remove the effect of these investor-driven decisions. Because the effects of cash flows are removed, a TWR doesn’t penalize or benefit a portfolio manager’s performance for contributions or withdrawals that the manager did not control.

Investment Manager-Driven Cash Flows

When the investment manager does have control over the timing and amount of external cash flows (e.g., private equity funds where the investment manager has control over capital calls and distributions), their effects should be included in the evaluation of the manager’s performance. An MWR, which includes the effect of timing and amount of external cash flows, would therefore appropriately penalize or benefit a portfolio manager for contribution and withdrawal decisions that were part of their discretionary management.

External Cash Flow Impact on Returns

Without external cash flows, TWR and MWR are equal. When external cash flows (and volatility) are present, the results will differ.

The following are examples of how the MWR and TWR will differ under different market scenarios:

  1. If a contribution is made and then the portfolio has subsequent performance that:
    • SHIFTS POSITIVELY – MWR > TWR (investor added money just before the upswing)
    • SHIFTS NEGATIVELY – TWR > MWR (investor added money just before the decline)
    • REMAINS STEADY – TWR = MWR (investor added money during a period without volatility)
  2. If a distribution is made and then the portfolio has subsequent performance that:
    • SHIFTS POSITIVELY – TWR > MWR (investor withdrew money just before the upswing)
    • SHIFTS NEGATIVELY – MWR > TWR (investor withdrew money just before the decline)
    • REMAINS STEADY – MWR = TWR (investor withdrew money during a period without volatility)

To help visualize how this works, below are three examples. For the sake of simplicity, we assume the portfolio perfectly replicates the index. The line on the graphs demonstrates the index return stream for the performance period while the filled in area represents the amount of capital invested during each segment of the period. Since TWR removes the effect of the external cash flows, the TWR will approximately equal the index return while the MWR will be impacted by the amount of capital invested for each segment of the performance period.

Example 1: A portfolio with a beginning value of $100k has a steady return of 10% without any volatility for the full period (scenarios with and without external cash flows):

No External Cash Flows and no volatility:
TWR = 10% and MWR = 10%
$50k ADDED at Mid-Point and no volatility:
TWR = 10% and MWR = 10%
$50k REMOVED at Mid-Point with no volatility:
TWR = 10% and MWR = 10%

The TWR and MWR is equal for all of these scenarios because there is no volatility. With a steady return stream, there is no market timing that would make external cash flows cause a difference between the TWR and MWR.

Example 2: A portfolio with a beginning value of $100k has a 10% increase, but subsequently declines to end the period at the same level at which it began.

No External Cash Flows:
TWR = 0% and MWR = 0%
= $50k ADDED at High Point:
TWR = 0% and MWR = -3.63%
$50k REMOVED at High Point:
TWR = 0% and MWR = 6.04%

The TWR is 0% for all scenarios because the strategy lost all of its initial gains to end up back at the starting point.

The MWR is negative when adding money at the high point because in this scenario the capital base is smaller while the strategy is performing positively and larger when the strategy is performing negatively.

The MWR is positive when removing money at the high point because in this scenario the capital base is larger while the strategy is performing positively and smaller when the strategy is performing negatively.

Example 3: A portfolio with a beginning value of $100k has a 10% decrease, but subsequently increases to end the period at the same level at which it began.

No External Cash Flows:
TWR = 0% and MWR = 0%
$50k ADDED at Low Point:
TWR = 0% and MWR = 3.71%
$50k REMOVED at Low Point:
TWR = 0% and MWR = -5.91%

The TWR is 0% for all scenarios because the strategy gained back all of its initial losses to end up back at the starting point.

The MWR is positive when adding money at the low point because in this scenario the capital base is smaller while the strategy is performing negatively and larger when the strategy is performing positively.

The MWR is negative when removing money at the high point because in this scenario the capital base is larger while the strategy is performing negatively and smaller when the strategy is performing positively.

Criteria to Determine When MWR is Appropriate

Ultimately, investment managers should be evaluated based on TWR unless specific criteria are met, in which case MWR is more appropriate. The criteria[1] for using MWR includes:

The investment manager has control over the timing and amount of external cash flows and the investment vehicle has at least one of the following characteristics:

  • Closed-end
  • Fixed life
  • Fixed commitment
  • Illiquid investments as a significant part of the investment strategy

MWR vs TWR for GIPS

The use of money-weighted returns in GIPS Reports instead of time-weighted returns has broadened under the 2020 edition of the Global Investment Performance Standards (“GIPS”). All firms can show MWRs in addition to TWRs if they wish to do so; however, if a firm wishes to replace its TWR with MWR, the criteria listed in the prior section must be met. For more information on these requirements, please see Question 10 of Longs Peak’s GIPS Compliance FAQs.

For more information on how to present performance information in compliance with the GIPS standards, see our recent article on updating GIPS reports to comply with the 2020 edition of the GIPS standards.

If you have questions about calculating investment performance or GIPS compliance, please contact us or email Sean Gilligan at sean@longspeakadvisory.com.


[1] Global Investment Performance Standards (GIPS®) – For Firms, Fundamentals of GIPS Compliance, Provision 1.A.35, pages 5-6.