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Investment Management

April 12, 2022

How Portfolio Returns Are Measured

Most investors are interested in their portfolio returns, but many go a step further and want to know how that performance is actually measured. While measuring a portfolio’s performance should be a relatively straightforward task, a portfolio’s composition can make that difficult. As a result, performance calculations may be different depending on the type of asset you are trying to measure.

If you find this confusing, you are in good company. Here we try to clear up some of the confusion by providing a better understanding of two different performance measures: time-weighted rate of return (TWR) and internal rate of return (IRR).

The significant difference between TWR and IRR is how cash flow is accounted for in or out of a strategy or portfolio. Exhibit 1 outlines some of the characteristics of the two methods in simple terms.

Exhibit 1

Using a TWR makes it easier to compare performance with various benchmarks and peer-like strategies and is the only way for portfolio managers to compare relative performance. IRR, on the other hand, measures a unique investment experience driven by a combination of returns and active decisions relating to when to add or reduce capital (e.g., purchasing and/or liquidating assets) in a particular fund. Exhibit 2 outlines the more appropriate measure for various asset classes.

Exhibit 2

Hypothetical example of returns for different client circumstances

Below we present three different hypothetical client experiences to illustrate the difference between TWR and IRR. Keep in mind that the primary driver of the different measures is how one accounts for cash flows into and out of the accounts: The TWR tells how well the investment choices performed, and the IRR tells how well the actual money put into this investment performed.

Setting the stage

Comparing TWW and IRTR for each hypothetical investor


Choosing the proper performance calculation method for specific asset classes is important in evaluating results. Including cash flows can affect results, as with the IRR methodology, but excluding cash flows can help derive a consistent investment comparison, as denoted by the TWR methodology. While it creates an element of complexity, investors who allocate capital to both private and public assets should consider evaluating two separate performance calculations, one incorporating a TWR approach and the other an IRR approach.

For more information about these methodologies, contact your Glenmede Relationship Manager.



This presentation is intended to be an unconstrained review of matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. Advice is provided in light of a client’s applicable circumstances and may differ substantially from this presentation. Opinions or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable, but accuracy is not guaranteed. Outcomes (including performance) may differ materially from expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss the applicability of any matter discussed herein with their Glenmede representative.