If the investor (client) has complete control over contributions and withdrawals of funds to and from the portfolio, which measure of portfolio return is the most accurate to use?
I think it would be the money weighted rate of return since the investor has control over the cash inflows / outflows in the portfolio. The main difference between both is that the money weighted return is skewed to the period where funds were at the highest, where the time weighted return is simply the HPR.
Time-weighted.
The measure you use should reflect the performance of the portfolio manager. If the client has control of the withdrawals and contributions, you know full well that he’s going to withdraw a lot of money just before the returns skyrocket, and contribute a lot of money just before the returns tank, severely lowering the money-weighted return. The portfolio manager shouldn’t be faulted for that.
ahhhh keyword i missed right there if the client (not the portfolio manager) has control over the cash inflows / outflows. Sorry about that man, magician is def. right on with that one.
If the portfolio manager has control over the contributions/withdrawals, then money-weighted is appropriate.
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Excellent, thank you both!
My pleasure.