Hi all,
My question is regarding the way to calculate the MWR in the case of inputs in cash flows AND in return percentages.
Here is the example:
At the beginning of Year 1, a fund has $10 million under management; it earns a return of 14% for the year. The fund attracts another $100 million at the start of Year 2 and earns a return of 8% for that year. I saw 2 ways of calculating this, but with different results. Can you please clarify what is the correct one ? Way1: t=0 : -10 t=1 : -100 t=2 : 10*1.14*1.08 + 100*1.08 MWR = 8.53% Way2: t=0 : -10 t=1 : -100 + 10*1.14 t=2 : 100*1.08 MWR = 8.58% Thank you !
Hi,
t=0:
There is $10 mln on the account.
OUTFLOWS: $10 mln
INFLOWS: -
t=1
$10 mln earns an interest in the amount of +$1,4 mln. It is just a capital gain. What is more there is an outflow of $100 mln to the investment. You have +$111,4 mln.
OUTFLOWS: $100 mln
INFLOWS: -
t=2
The fund (so all money that we have) earns money again. You have $111,4*1,08 = 120,31.
OUTFLOWS: -
INFLOWS: $120,31
Ok, then concluding:
Therefore the Way1 is correct.
The Way2 is incorrect, because:
-
For MWRR capital gains are not in the calculations. Just what we withdraw or pay in.
-
It would seem that $10 + interest after the first year disappears from the account.
I am also not so sure, whether what you get to the account is outflow or inflow. It does not have an influence on the result, if you will be consequent about it, but logically thinking the money that come to the account should be an inflow, and that go out should be an outflow.
Thanks losterloc.
However, I actually saw that sometimes we use Way 2 to calculate the MWR (example below).
Anybody explains why and when to use the right method please ? I’m confused…
Thank you!
Example :
Year Assets Under Management at the Beginning of Year (€) Net Return (%) 1 30 million 15 2 45 million –5 3 20 million 10 4 25 million 15 5 35 million 3
In this example, we used Way 2 to calculate, meaning :
Way2:
t=0 : -30
t=1 : -45 + 30*1.15 = -10.5
t=2 : -20 + 45*0.95 = 22.75
t=3 : -25 + 20*1.1 = -3
t=4 : -35 + 25*1.15 = -6.25
t=5 : 35*1.03 = 36.05
MWR = 5.86%
With Way 1, I got MWR = 6.73%