Comparison
TWR or IRR? Which return a family office measures
Updated: · Leutrim Miftaraj, FLIORE · Editorial standards · Deutsche Fassung
Short answer
The time-weighted return (TWR) neutralises inflows and outflows and therefore measures the performance of an investment strategy or manager. The internal rate of return (IRR) takes the size and timing of flows into account and measures what the family actually earned on its money. TWR applies to liquid portfolios and comparisons with indices, IRR to private equity and direct holdings, complemented by MOIC.
The difference in one sentence
TWR answers: how well did the investment perform? IRR answers: how much did the investor earn with their specific contributions and withdrawals? Both questions are legitimate, but they give different answers as soon as money flows in or out during the period.
Comparison
| TWR (time-weighted) | IRR (money-weighted) | |
|---|---|---|
| Measures | Performance of the investment or manager | Result for the investor |
| Inflows and outflows | Neutralised | Included with size and timing |
| Suitable for | Liquid portfolios, manager comparison, benchmark | Private equity, direct holdings, property projects |
| Standard | GIPS for most portfolios | GIPS for certain private investments, ILPA reporting |
| Data needed | Valuation at every flow | Flows with dates and ending value |
A worked example
A portfolio starts with 1 million. In the first half-year it rises by 10 per cent to 1.1 million. The family then adds 1 million, and the portfolio falls by 5 per cent in the second half to 1.995 million. The TWR chains the two halves: 1.10 × 0.95 − 1 = 4.5 per cent. The IRR, by contrast, is slightly negative, around minus 0.3 per cent annualised: 2 million were invested in total and 1.995 million remain, because the additional money was invested exactly in the weak phase. The manager did a decent job; the timing of the contribution was unfavourable – and that was the family's decision.
When to use which
- Assessing managers and comparing with a benchmark: TWR.
- Following the family's total wealth over the years: TWR, complemented by the absolute change in value.
- Private equity funds and co-investments: IRR and MOIC (multiple on invested capital).
- Own projects with clear payments in and out, such as property developments: IRR.
Limits of both
TWR needs a valuation at every flow; with infrequent valuations it becomes inaccurate. IRR reacts strongly to early returns and on its own says nothing about the absolute size of the gain – which is why MOIC belongs alongside it. Measuring short periods with IRR can produce exaggeratedly high or low values.
In FLIORE
FLIORE calculates TWR, IRR and MOIC per mandate from the recorded valuations and flows, consolidated in the selected reporting currency. The monthly report shows the figures side by side so that families understand both views.
At a glance
| TWR | Performance of the investment, flows neutralised |
|---|---|
| IRR | Investor's result, flows weighted |
| Complement | MOIC for private investments |
Frequently asked questions
Why does my report show two different returns?
Because TWR and IRR answer different questions. If they diverge widely, the timing and size of contributions and withdrawals had a large influence.
Which return do the GIPS require?
For most portfolios the time-weighted return. For certain private investments and closed-end structures the GIPS allow money-weighted returns.
What is the Modified Dietz method?
An approximation of TWR that weights flows within a period by time when not every flow is accompanied by a valuation.
Can IRR and TWR be added or averaged?
No. They are different measures that should be shown side by side and explained.
Sources
- Global Investment Performance Standards (GIPS) – CFA Institute
- ILPA – Performance reporting
- CFA Institute – Performance measurement
This page provides orientation and does not replace legal or tax advice. The cited legal sources in their applicable version are authoritative.
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