What is the better: time weighted or money weighted returns?
You probably heard of timeweighted and moneyweighted returns. This is a way of measuring the performance of your portfolio.
Timeweighted is used a lot in external benchmarks line INREV and MSCI. It is valuing every quarter equally, regardless of the assets under management in each quarter. It is therefore a good measurement when you are not responsible for acquisitions.
Moneyweighted is the standard in most of the investment proposals or underwriting models. The money that you invest in a quarter matters. It is therefore a good measurement when you are responsible for acquisitions.
Let’s take an example. Let’s say we are starting a new fund. In the first year we buy assets for 100 million. We have a lot of vacancy and startup costs for the new fund. In that first year we have to accept a loss of 5%.
In year two we buy new assets for another 100 million. We get a net rent of 5%.
Now let’s check the results. We see that the money weighted return is 17 times the time weighted return.
Wow, what a big difference! Why? Because the assets under management is not equal in each period. The loss in the first year has more weight in the time weighted return.
So when you are in the startup phase of a fund, the time weighted return will always be lower than then the money weighted return. And that is good to know and understand!
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