Time-Weighted and Money-Weighted Rates of Return

Date

May 8, 2025

When assessing the performance of an investment, understanding its return is crucial - but not all returns are calculated equally. Two important metrics, Time-Weighted Rate of Return (TWRR) and Money-Weighted Rate of Return (MWRR), offer different perspectives on how well an investment is doing. While both measure the return on a portfolio, they differ in how they account for cash flows (like contributions and withdrawals) and, consequently, in what they reveal about an investment's performance.

In this post, we’ll explore these two metrics in detail, breaking down what they measure, how to calculate them, and how Finticx uses these in practice. By the end of this article, you'll have a clearer understanding of how each rate of return rate helps you evaluate performances and make better decisions.

Before we get into the details

The time weighted return calculates the return WITHOUT the effect of cash in and outflows from the portfolio – the volume of the investment does not matter. It is most commonly used to evaluate a fund manager’s performance, as the individual’s decisions to add or withdraw capital from the portfolio are not reflected in the return.

The money weighted rate of return calculates the return INCLUDING the capital in and outflows - the volume and change in volume of the investment does matter . It is used to determine the actual return on the investment and to assess whether the timing and size of capital additions or withdrawals had a positive or negative impact on overall performance.

Time-Weighted Rate of Return (TWRR)

The Time-Weighted Rate of Return (TWRR) is a measure of the return on an investment that isolates the impact of cash inflows and outflows. Unlike other measures that account for capital contributed or withdrawn during the investment period, TWRR calculates how the investment performs over time without considering when or how much money was added or removed. This makes TWRR particularly useful for evaluating the performance of a fund manager or a market index.

Who Uses the TWRR?

The Time-Weighted Return is primarily used by wealth managers and investment professionals to assess the performance of a portfolio, especially when comparing the effectiveness of different fund managers. Wealth managers are often the primary decision-makers for their clients' portfolios, but they may not control when capital is added or withdrawn.

For example, in a scenario where a wealth manager oversees a client’s investment in mutual funds, the fund manager is responsible for daily investment decisions. The wealth manager’s role is to oversee the overall portfolio and may choose to add or withdraw capital at various points. By applying TWRR, the wealth manager can compare the performance of different fund managers objectively, without the impact of their own decisions to add or withdraw capital.

TWRR is most useful for portfolios like mutual funds, public securities, pooled investment vehicles, and in benchmark comparisons. It is usually published by asset managers and companies in compliance with the Global Investment Performance Standards (GIPS), which ensures the transparency and fairness of performance reporting for investment managers.

How to Calculate the TWRR?

To calculate the TWRR, you break the total investment period into smaller time segments, called sub-periods, whenever cash flows occur (such as a deposit or withdrawal). The return for each sub-period is then calculated, and the geometric mean is used to link them together.

The formula for TWRR is as follows:

TWRR = (1 + return in sub-period 1) × (1 + return in sub-period 2) × ⋯ × (1+return in sub-period n) − 1

Example Calculation TWRR

Let’s walk through a simple example:

On January 1st, an investor invests €10 million in a portfolio. The market value is therefore €10 million as well.
In January, the portfolio's market value has decreased to €8.5 million. Despite the drop in value, the investor decides to add another €3 million to the portfolio.
At the end of the investment period, the investment gets withdrawn for €15 million.

1. Sub-period 1 (Until Cash Inflow)

Sub-period 1 spans from the first deposit to the next cashflow. The return of this period is calculated as the ending market value (here valued at €8.5 million) divided by the initial value (here €10 million of the initial investment) minus 1.

Return for sub-period 1: (€8.5M/ €10M) - 1 = 15%

2. Sub-period 2 (After Cash Inflow)

Return for sub-period 2: (€15M/ €11.5M) - 1 = 30.43%

3. Final TWRR Calculation:

To calculate the overall TWRR, we combine the returns from both sub-periods using the geometric formula:TWRR = (1 + Return Sub-period 1) × (1 + Return Sub-period 2) − 1

TWRR: (1-0.15) x (1 + 0.3043) -1 = 10.87%

How can Finticx help?

Finticx automatically calculates the Time-Weighted Rate of Return (TWRR), showing monthly returns without the need for manual calculations. It also displays a cumulative line, providing detailed insights into the investment's performance over time. This makes it easy to track how well the investment is performing, independent of cash flows or timing. You can also view returns to your needs - for example, by selecting a 3-year period and breaking it down by quarters.

Money-Weighted Rate of Return (MWRR)

The Money-Weighted Rate of Return (MWRR), also known as the dollar-weighted return, is a metric that takes into account the timing and amount of cash inflows and outflows. Unlike the TWRR, the MWRR reflects the actual performance of the investment, factoring in when and how much capital was added contributed or withdrawn from the portfolio. In essence, the MWRR is the same as the Internal Rate of Return (IRR) of the investment. It calculates the average annual return on the capital invested at any given time.

When is the MWRR used?

The MWRR is particularly useful for measuring the return on private equity, venture capital, real estate investments, or project-based investments such as in infrastructure and renewable energy. These types of investments often involve irregular and significant cash flows, such as capital calls and distributions, making MWRR the preferred metric for evaluating their performance.

How do I calculate the MWRR?

Calculating the MWRR manually is complex because it involves trial and error to find the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero. However, financial calculators, spreadsheet software like Excel, and tools like Finticx can simplify this process.

In Excel, the formula to calculate MWRR is =XIRR(values, dates), where values are the cash flows (positive for deposits, negative for withdrawals) and dates correspond to each cash flow.

Let’s make it concrete by looking at the same investment that we have seen in the example before.

Example Calculation MWRR

Here, again, the scenario. The investor initially invests €10 million. By the time the investor decides to add €3 million, the market value of the portfolio drops to €8.5 million. Subsequently, the portfolio’s market value increases and at the end of the investment period is at €15 million and is withdrawn.
The return is calculated considering the cash flows and the changes in the portfolio's value, but instead of calculating the return on each sub-period separately, we need to find the internal rate of return (IRR) that equates the present value of the cash flows to zero.

By using the =XIRR function in Excel, we calculate that the MWRR is 17% for this one-year investment.

How can Finticx help?

Finticx automatically calculates the Money-Weighted Rate of Return (MWRR) by factoring in cash flows and portfolio performance. It handles the timing and amounts of inflows and outflows which simplifies the process and avoids errors in calculations. Additionally, Finticx shows cumulative percentages and supports calculations for periods that are not exactly one year. Additionally, you can customize your views in displaying monthly, quarterly, semester, or yearly returns over one or multiple year, or even history-to-date.

Good to know

Can the TWRR and the MWRR be the Same?

In a one-year period with no cash inflows or outflows, the TWRR and MWRR will be the same. However, in most cases, they will differ because cash flows significantly affect the MWRR but are excluded from the TWRR.

Can You Have a Positive Absolute Return but a Negative TWRR?

Yes, it’s possible. For example:

You invest €1,000 at the beginning of the year.
In the first half of the year, the market value of the investment drops by 20%, so it’s worth €800.
You then add €9,000 to this portfolio, bringing your total investment to €10,000 at a market value currently at €9,800.
In the second half of the year, the investment’s market value rises by 4%, bringing the total value of the portfolio to €10,192.

Despite having a positive absolute return of €192 (or 1.92%), the TWRR is negative because the majority of your capital was invested after the poor performance in the first half of the year but the TWRR does not factor in the length of the periods.

How Do Cash Flow Timing Affect TWRR and MWRR?

The timing of cash flows plays a critical role in how TWRR and MWRR compare. If additional capital is invested just before a period of high performance, the MWRR will generally be higher than the TWRR, as the new capital will benefit from strong performance. Conversely, if capital is invested before a period of low performance, the MWRR will be lower than the TWRR.

Conclusion

Understanding both Time-Weighted Return (TWRR) and Money-Weighted Return (MWRR) is crucial for wealth managers and investors alike. Each metric provides valuable insights into the performance of an investment, but they serve different purposes. TWRR isolates the return of the investment itself, free from external cash flows, while MWRR reflects the actual return, taking into account when and how much capital was added or withdrawn.