It’s probably fair to say understanding and accurately measuring investment performance in financial services is key. Unlike time-weighted returns, MWR offers a unique perspective that can be more relevant for individual investors and advisers managing client portfolios. 

In this article I’ll look at the fundamentals of money-weighted returns and why they are important.  

The fundamentals of money-weighted and time-weighted returns

Simply put, the two differences are: 

• Money-weighted returns: consider the effects of cash flows into and out of the portfolio  
• Time-weighted returns: disregard the effects of cash flows into and out of the portfolio  

Money-weighted returns measure the performance of an investment portfolio by considering the impact of all monetary inflows and outflows – such as contributions and withdrawals on the overall investment return.

Time-weighted returns calculate the return based on the performance of the underlying assets, ignoring the timing and size of any inflows or outflows. This approach is useful for comparing the performance of fund managers, as it standardises returns across different portfolios. However, this method might not accurately reflect an investor’s real return, especially when taking in to account any significant cash inflows and outflows. 

On the other hand, money-weighted returns provide a rate of return that accounts for the timing and number of inflows and outflows. Simply put, MWR answers the question ‘What rate of return did my client earn with their investment?’  

So, why aren’t all advisory firms using money-weighted returns?

In a word, data! Accurate data is crucial for calculating MWR, as it relies on precise records of every transaction, deposit, and withdrawal to determine the true performance of an investment relative to the investor’s specific cash flow events.  

To calculate MWR, detailed records of all cash inflows and outflows within the investment portfolio are required. This would include deposits, withdrawals, dividends, interest payments and other transactions that affect the portfolio’s cash position. Accurate and comprehensive inflow and outflow data is crucial because MWR calculations depend on the timing and amount of these cash flows.  

Portfolio valuations at each inflow and outflow

Also required are the values of the portfolio at each point when inflows or outflows occur. This involves knowing the portfolio’s value before and after each transaction. Accurate portfolio valuations at each cash flow date are essential to accurately assess the impact of each transaction on the overall performance.  

Sophisticated investment data software

Given the complexity of MWR calculations, using sophisticated investment data software that can handle the detailed calculations is highly beneficial. For example, Sprint Enterprise’s FINIO data hub powers their Fastrak reporting solution. To do this, valuation data, including policy numbers, ISINs, unit counts, and prices, moves smoothly from investment platforms to the FINIO data hub. However, the complexity is in the 3,000+ regularly changing transaction codes, understanding the inflow and outflow codes and having the flexibility to accommodate occasional historical transaction corrections is vital.   

Reconciliation is challenging for policies spanning 20 or so years with thousands of transactions, yet it’s essential for precise client reporting. The FINIO data hub streamlines this process by enriching, reconciling, and normalising data, ensuring users of the data receive report-ready information.  

Sprint Enterprise’s view of money-weighted returns

This is why Sprint Enterprise employs money-weighted rates of return for portfolio performance and is the equivalent of the Extended Internal Rate of Return (XIRR) function in Excel.   

Experience and industry experience tell us this is the best way to report performance on a private investment portfolio, as it takes account of both the timing of inputs and withdrawals and the amount of invested capital at any time, and Sprint Enterprise believes this is the correct measurement, with calculations available on both an annualised and non-annualised basis within the Fastrak reporting software. 

If you have any questions about money-weighted returns, the FINIO data hub, or Fastrak reporting, schedule a call here.

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• Full investment performance reports between dates
• Rebalance portfolios and produce customised client reports
• Produce detailed client valuation reports
• Show clients performance of their portfolio online

“We are committed to providing the best service to our advisers and this new integration is a shining example of that. Sprint Enterprise is the first partner to consume and fully reconcile our transaction data and this will enable their clients to get full transaction histories into both Fastrak and FINIO.”

Mike Morrow, chief commercial officer, Parmenion

Contact us to discuss how Parmenion’s data in Fastrak can provide you with an enhanced client reporting solution for your business on 0333 939 8270.

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This integration enables Fastrak clients to run:

• Full investment performance reports between dates
• Rebalance portfolios and produce customised client reports
• Produce detailed client valuation reports
• Show clients performance of their portfolio online

Contact us now for a chat to see how Aegon data in Fastrak can provide you with an enhanced client reporting solution for your business on 0333 939 8270.

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Contact us to dicuss how Hubwise data in Fastrak can provide you with an enhanced client reporting solution for your business on 0333 939 8270.

The post Hubwise transaction data now available in Fastrak reporting appeared first on Sprint Enterprise Technology.