Time-Weighted Return Vs Simple ReturnThe time-weighted return (TWR) assumes that all your KiwiSaver contributions were invested with us on day one. The simple return makes no assumptions about timing – it is simply the value of your account divided by your contributions. The reality is that your effective rate of return lies somewhere between the TWR and the simple return, because you contribute dollar amounts at different times. Neither the TWR or simple return take full account of the timing and size of your contributions.
The following table gives an example of how the time-weighted return (TWR) and simple return are calculated. In this example, contributions are made over three months, so the simple return is 2.6% and the time-weighted return is 8.90%. If all of the $1,500 contributions were made in the first month, then the value of the account would be 8.90% higher, or $1,633.50, by the end of the third month. If the contributions were all made in the first month, then the time-weighted return and the simple return would be identical.
| Time-Weighted Return |
| |
Contributions |
Start Value |
Return |
End Value |
Cumulative TWR index
Base = 100 |
Cumulative TWR return |
| Month 1 |
$1,000 |
$1,000 |
10% |
$1,100 |
110.0 |
10% |
| Month 2 |
$0 |
$1,100 |
10% |
$1,210 |
121.0 |
21% |
| Month 3 |
$500 |
$1,710 |
-10% |
$1,539 |
108.9 |
8.9% |
| Time weighted return for three months: 8.90% |
| Simple Return |
| Total contributions: |
$1,500 |
| End value: |
$1,539 |
| Simple return: |
=(1,539/1,500)-1
= 2.60% |
The TWR allows a meaningful comparison between your account’s performance and the benchmark. It measures our skills as an investment manager, independently of the amount of money we’re managing. So a 10% return is a 10% return no matter how many dollars that return actually represents. |