What NOT to Compare on Performance Reports

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What to NOT to compare | Marotta on Money

One of the most frequent sources of confusion about performance reports stems from expecting various numbers on different reports to match.

The best performance reporting software measures a wide variety of different factors, giving investment managers and their clients several ways to analyze the portfolio. By definition and design, different types of reports produce different numbers.

Here are some of the most common items that should NOT be compared:

Internal Rate of Return ≠ Time Weighted Return

All returns are not created equal. Internal Rate of Return (IRR) measures the overall growth of the portfolio. Time-Weighted Rate of Return (TWR) measures the growth of the average $1.00 in the portfolio. These number may be close if there are few, small or no cash flows during the time period, but usually IRR and TWR differ.

Percent Gain/Loss ≠ IRR or TWR ≠ Yield

Neither Percent Gain/Loss nor Yield should be compared to IRR or TWR. Percent Gain/loss is the current market value minus the cost basis divided by the cost basis. Yield is the number that results from dividing the annual dividends paid by the current price. If you’ve seen the math for IRR and/or TWR, you’ll know it’s not even remotely close.

Tax reports ≠ Performance Reports

Tax reports measure the amount of gain or loss based on the purchase price. Performance reports measure the amount of gain during the time period of the report based on market value.

Dollar Gain/Loss ≠ IRR or TWR

Dollar Gain/loss is a different creature than IRR and TWR. Dollar Gain is the current value minus the cash invested (of which there are 3 different types). Dollar gain can be a negative number while the TWR is a positive number and vice-versa.

Performance Contributions/Withdrawals ≠ Checks written and deposited

The total contributions and withdrawals on performance reports rarely matches the sum of the checks the client wrote or added during the period. For performance purposes, items other than checks in and out are included in performance contributions and withdrawals.

This post first appeared on Krisan’s Backoffice, Inc and is reprinted here with permission. Photo used here under Flickr Creative Commons.

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Portfolio Center Specialist

Krisan Marotta is the Portfolio Center Specialist for Marotta Wealth Management as well as the owner of Krisan's BackOffice. She has handled every type of transaction, corrected every data error, and makes it a point to investigate the best ways to use every feature of PortfolioCenter.