Sub-Period Returns

Enter the return for each sub-period (between cash flows). TWR links these returns to measure performance independent of cash flow timing.

Used to annualize the TWR
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

When to Use TWR

  • Manager evaluation: Compare managers fairly
  • GIPS compliance: Industry standard reporting
  • Benchmark comparison: Apples-to-apples
  • Strategy analysis: True strategy performance

Time-Weighted Return

Annualized Time-Weighted Return +15.24% Excellent

Outstanding time-weighted performance

Cumulative TWR +15.24%
Geometric Mean (per period) +3.62%
Calculated from 4 sub-periods

TWR vs MWR

TWR measures manager performance (cash-flow neutral). MWR measures investor experience (includes timing effects). Use both for complete analysis.

Formula Breakdown

TWR = [(1+r1)(1+r2)...(1+rn)]1/years - 1

Understanding the Results

Cash Flow Neutral

TWR eliminates the impact of deposits and withdrawals. It shows how well the portfolio performed regardless of when money moved in or out.

Industry Standard

GIPS (Global Investment Performance Standards) requires TWR for performance reporting. It's how professional managers are evaluated.

TWR Performance Interpretation

Return Rating Interpretation
> 15% Excellent Significantly outperforming benchmarks
10% - 15% Good Above market performance
5% - 10% Moderate In line with market returns
0% - 5% Low Below market average
< 0% Negative Capital loss

Understanding Time-Weighted Return

What is Time-Weighted Return?

Time-weighted return (TWR) measures investment performance by eliminating the impact of cash flows. It calculates the compound rate of return as if no deposits or withdrawals occurred during the measurement period.

This is achieved by breaking the total period into sub-periods at each cash flow, calculating the return for each sub-period, then geometrically linking them together.

Key Insight: TWR answers: "How did this investment strategy perform?" It doesn't tell you how much money you made or lost - for that, you need money-weighted return (MWR/IRR).

TWR vs MWR: Which to Use?

Aspect Time-Weighted (TWR) Money-Weighted (MWR)
Cash flow impact Eliminated Included
Best for Manager/strategy evaluation Personal portfolio assessment
Measures Investment skill Investor experience
GIPS required Yes No

Why Cash Flow Timing Matters

Consider a manager with these quarterly returns: +20%, -10%, +15%, -5%

  • Investor A invests $10,000 at start, adds $10,000 before the -10% quarter
  • Investor B invests $10,000 at start, adds $10,000 before the +15% quarter

Both experience the same manager (same TWR), but their actual dollar returns (MWR) differ substantially because of timing. TWR lets you evaluate the manager fairly, regardless of when investors added or withdrew money.

Important: TWR requires valuing the portfolio at every cash flow date. Daily valuations are ideal but not always practical. More frequent valuations produce more accurate TWR calculations.

The TWR Calculation Process

  1. Identify sub-periods: Break the total period at each cash flow
  2. Calculate HPR: Compute holding period return for each sub-period
  3. Geometric linking: Multiply (1 + HPR) for all sub-periods
  4. Subtract 1: Convert back to a return percentage
  5. Annualize (optional): Raise to power of (1/years) for comparability

Frequently Asked Questions

Time-weighted return (TWR) measures investment performance by eliminating the impact of cash flows. It calculates returns as if no money was added or withdrawn, making it ideal for evaluating portfolio manager skill independent of investor timing decisions.

TWR is calculated by: 1) Dividing the investment period into sub-periods at each cash flow, 2) Calculating the holding period return for each sub-period, 3) Linking these returns by multiplying (1+r) for each period, and 4) Annualizing if needed by raising to the power of (1/years).

TWR removes the impact of cash flow timing, which investors control but managers do not. A simple average or money-weighted return would penalize managers if clients withdraw money before gains or add money before losses, even though the manager has no control over these decisions.

TWR (Time-Weighted Return) eliminates cash flow effects and measures manager performance. MWR (Money-Weighted Return/IRR) incorporates cash flow timing and measures the investor's actual dollar-weighted experience. Use TWR for manager evaluation, MWR for personal portfolio assessment.

TWR is most appropriate for: evaluating portfolio managers against benchmarks, comparing investment strategies, GIPS-compliant performance reporting, and any situation where cash flow timing should not affect performance measurement.

TWR creates sub-periods whenever a cash flow occurs. Each sub-period's return is calculated independently, then all sub-period returns are geometrically linked by multiplying their (1 + return) values together. This process neutralizes the impact of deposits and withdrawals on the overall return calculation.
Disclaimer

This calculator is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Always consult with a qualified financial advisor before making investment decisions.

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