Intuition behind valuation of Portfolio and Composite?

CFA Level III
#1

1.Why is “time weighted using beginning of period asset values and external cash flows” mandatory for portfolios

while

  1. Asset weighting individual portfolio eturns OR a method that reflects both beginning of period assset values and external cash flows allowed for composite?

I’m too tired and unimaginative now to guess why composite treated different from portfolio

#2

your client’s portfolio (say it’s an equity mutual fund or something) should be valued using time-weighted returns so that you as the portfolio manager (PM) are not penalized for cash inflows/outflows. You do not have control over the cash - your client does. So Time weighted removes the impact of those flows

Composites are asset weighted so that larger portfolios impact the composite return more…I don’t know the logic behind that though…

#3

http://gipsstandards.org/standards/guidance/develop/pdf/gs_calculation_methodology_clean.pdf

has good examples of how the different weighting schemes for composites can be used. They say you can use any , but be fair and transparent

#4

Time weighted and money weighed return is same with now cash flows. Composite as such will not have any cash out flows. Its just an aggregation of number of portfolios returns. Individual portfolio on the other had will have different amount of cash out flows at different times. So money weighted and time weighted returns are different. If the cash flow are not large then the return valuation is close, so modified dietz is allowd. However, large external cashflows cause big differences betwee money weighted and time weigthed returns, so portfolios are mandated to be evaluated when such large cash flows happen.