time weighted return
Time Weighted Return measures how well an investment itself performed, ignoring the effect of money you added or withdrew along the way.
In plain English
"Ah ah, my fund manager said I made 18 percent this year, but my own calculation is giving me 9 percent. Who is lying?" Tunde asked his sister, waving his statement like evidence in a court case.
"Nobody is lying," she said, laughing. "You just put in a fresh ₦2,000,000 in November, right before the market rallied. Your manager is measuring how good the fund's picks were. You are measuring how good your timing was. Those are two different questions."
That is the whole story of Time Weighted Return. It strips out the drama of when money entered or left the account, and looks purely at the performance of the investment during each stretch of time it was actually invested. Fund managers love it because it judges their skill, not your deposit habits.
Say a fund starts the year with ₦1,000,000 and grows it to ₦1,100,000 by June, a 10 percent gain. Then in June, an investor adds ₦900,000, taking the pot to ₦2,000,000. By December it has grown to ₦2,100,000, only a 5 percent gain for that second half. Time Weighted Return chains those two periods together, 10 percent then 5 percent, to get the true underlying performance, regardless of the extra cash that landed in June.
A Nigerian mutual fund will usually quote its returns this way, because it would be unfair to let one investor's lucky top up right before a market rise make the fund look like a genius. In the United Kingdom, this is exactly how pension fund performance gets compared across providers, so that a saver adding money monthly through auto enrolment can still judge the fund on its own merits.
If you send money home and your relative invests some of it in bits and pieces over the year, do not judge the investment's quality by your combined total return. Ask what the Time Weighted Return was. That number tells you if the fund manager actually knows what they are doing.
A fund grows 10 percent in the first half of the year, then an investor adds fresh cash, and it grows another 5 percent in the second half. The Time Weighted Return links both periods to show a true underlying performance of about 15.5 percent, separate from how much extra money came in.
Questions people ask
How is Time Weighted Return different from the return I calculate myself on my statement?
Your own rough calculation usually mixes performance with the effect of your deposits and withdrawals, so a big deposit right before a good month can flatter your number. Time Weighted Return separates those two things and shows only how the investment itself performed.
Why do fund managers prefer to quote Time Weighted Return?
Because it judges their decisions and stock picking, not the timing of client cash flows, which they usually do not control. It gives a fairer, more comparable consider across all their investors.
Should ordinary investors care about this if we are not fund managers?
Yes, because it helps you judge a fund honestly before you commit your money. If a fund's Time Weighted Return is weak, no amount of clever timing on your part will save the underlying investment quality.
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