Time Weighted vs Money Weighted because, opposite, account, return, period

dkishore1

Hey guys

It says that time weighted rate of return (HPR) is a better measure because it does not take into account the timing of the cash flows.. Money weighted (IRR) on the other hand will tend to be lower than time weighted if funds are contributed into the portfolio just before a period of relatively poor portfolio performance. And the opposite is true as well.
Please explain what this means

Bulla564

What they mean by Time Weighted Return being superior is that it removes the impact of market timing and gives you a more accurate gauge of the performance of an investment over a specified time horizon.

Think of a portfolio manager. Let's say on January 1st his assets under management are 75MM. And let's say the market dips, he goes down to 60MM, but he recovers and finishes the year at 90MM on December 31st, a nice 20 percent return from where he started on Jan 1st. I can look at the advisor and compare his results to the appropriate benchmark.

Let's say some schmuck invested with said portfolio manager when his AOM were 75MM as in the previous example, but when the market dipped he sold out when the PMs assets were down to 60MM. This investor has a money weighted loss of 20 percent.

If you were to look at said schmuck and ask him how his advisor did, the results he would give you would be terribly swayed by the market timing decisions of the individual investor and not give you any real indication how a portfolio (or mutual fund or stock etc) actually performed.