Two reports on the same portfolio can show different returns and both be right. The reason is usually the method: time-weighted or money-weighted.
Time-weighted return
TWR splits the period at each cash flow into sub-periods, calculates their returns and chains them. Contributions and withdrawals therefore do not affect the result. That makes TWR the right metric for assessing an asset manager who does not control the timing of cash flows. The GIPS performance standards require the time-weighted method for most asset classes.
Money-weighted return
MWR equals the internal rate of return of all cash flows. If a family injected a lot of capital just before a market rise, its money-weighted return is higher than the time-weighted one. MWR thus shows what the investor actually achieved with their decisions and is the usual metric for private market investments with capital calls.
What a report should show
TWR per mandate to assess managers, and for the family’s overall view often MWR across consolidated assets, each clearly stating method, currency and whether before or after costs. Different methods in different reports are a common source of misunderstanding between family, family office and banks.
Data basis
Both methods require complete and reconciled data on holdings and cash flows. Without reconciliation with custodians and clean look-through consolidation, both figures are of little value. How this is organised in a family office is described in our article on consolidated reporting.