Explained: Simple return vs time-weighted return
There are several ways to display rates of return on an investment.
At Fundment, we currently show a simple return (as pounds and pence) and a time-weighted return (as a percentage). These figures rarely match exactly, so let us explain the difference…
What is the difference between a time-weighted return and a simple return?
Put simply, they represent different things.
A simple return shows a straightforward financial gain (or loss) over a period. If we started with a £1,000 investment and it grew to £1,100, the simple return is £100.
It is a portfolio’s end value minus its start value and fees, and net of any cash flow (contributions and withdrawals). Whatever is left: the simple return.
A time-weighted return instead shows the performance of the underlying investment strategy by stripping out any cash flow.
It is calculated by splitting the period into days (this is how we do it at Fundment) and figuring out the daily return, net of cash flow. Each day’s return is then multiplied for a time-weighted return.
This difference in calculation can mean the simple return and the time-weighted return rarely match exactly. One can even be positive while the other is negative.
“A time-weighted return seeks to give an ‘unbiased’ view of returns...”
Example 1: The difference between a time-weighted return and a simple return
One of our favourite ways to think about this is as follows…
A client opens a pension and a Flexible ISA at the same time and puts a lump sum – say £20,000 – in each.
Both the pension and ISA invest in the same strategy.
Over the next six months, the client adds £1,000 a month steadily into the pension.
During the same period, the client withdraws some money from their Flexible ISA to pay for home improvements, and later puts it back.
The client’s time-weighted return across both the pension and ISA will be the same because the underlying investment strategy was the same.
However, their simple return will be different because their cashflow was different.
Why is a time-weighted return important?
A time-weighted return seeks to give an 'unbiased' view of returns by showing how the investment strategy itself is doing.
We think it can help advisers assess performance and compare investments without the potentially distorting effects on growth rates caused by cashflow.
Example 2: Simple return vs time-weighted return
Consider another example of how cashflow - in this case a regular contribution of £10,000 - can affect returns, depending on which measure you’re looking at.
In the table below, see how the contributions help the client achieve an overall positive simple return.
The time-weighted return instead shows the ‘unbiased’ portfolio performance - effectively what would have happened if the client had not made any contributions or withdrawals during the period.
| 1/1/22 | 1/4/22 | 1/7/22 | 1/10/22 | 1/1/23 | 1/4/23 | 1/7/23 | 1/10/23 | 1/1/24 | |
|---|---|---|---|---|---|---|---|---|---|
| Total invested | 176,000 | 186,000 | 196,000 | 206,000 | 216,000 | 226,000 | 236,000 | 246,000 | 256,000 |
| Contributions | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | |
| Portfolio valuation | 176,000 | 176,000 | 174,000 | 188,000 | 198,000 | 210,000 | 222,000 | 232,000 | 257,000 |
| Quarterly returns | -5.4% | -6.5% | 2.2% | 0.0% | 1.0% | 0.9% | 0.0% | 6.2% | |
| Simple return | 0.4% | ||||||||
| Time-weighted return | -2.1% |
This content is for financial advice professionals only.