On the Money

Measuring investment performance by Kathy Lakritz, investment manager with Schenck Investment Solutions LLC.

Most investors do not know how their portfolios have performed. Partly to blame is the fact that brokerage statements generally do not show investment performance. The basic definition of investment performance is the total sum of interest, dividends, realized and unrealized gains or losses. Since mutual funds represent a popular way to invest, let’s look at how to evaluate those returns.

There are differences in the returns earned by the average investor in a mutual fund and the returns reported by the investment manager of the fund. The average investor may have invested at different times in the fund. The investor’s return is a flow-weighted return. This return is also called “dollar weighted” and represents the investor’s internal rate of return. 

The skill of the fund manager is measured in a different method, called “time-weighted” rate of return. This measures the manager’s abilities and eliminates the influence of cash flows (which the manager has no control over). The public numbers that a mutual fund reports are time-weighted since they represent the most appropriate measure of the manager’s abilities.

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