Hi guys,
If someone actually has control over the deposit and withdrawals in an investment account, would the money weighted rate of return be more appropriate than the time weighted rate of return? In this case, why couldn’t we still use the time weighted rate of return?
thanks for your help!
You’re correct.
Under GIPS, you generally have to present time-weighted returns because the cash inflows into and outflows out of the account are at the discretion of the client, so you don’t want the manager’s performance affected by those. However, if the manager has control of the cash inflows and outflows, then money-weighted returns are more appropriate, and comply with GIPS.
In sum, Money-weighted Rate of Return is more appropriate for assessing “actual earnings of the client”, Time-weighted Rate of return is appropriate for assessing the “fund manager’s performance”.
Again, this is true _ only if _ the fund manager is not responsible for the cash flows into and out of the fund. It is not a universally true statement