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Understanding Performance in Tamarac Reporting

Contents

Introduction

Tamarac Reporting calculates returns in a variety of ways. It is important to understand the implications of using each return method and how the portfolio data will affect the final result.

For more information on how Tamarac handles specific situations, see Learn More About Calculations.

Return Calculations

Intervals

To calculate returns, Tamarac Reporting uses intervals. Intervals are calculated at the position, sector, asset class, portfolio, and group level. An interval represents the change in value for that level over a specific period of time. Tamarac Reporting stores intervals on a daily basis.

The core structure of an interval is defined by the following and is calculated by the following formula:

Related Links

• Show Returns Across Holdings Gaps
• Show Returns for Closed Accounts
• See IRR Across Previously Held Positions

Interval Performance Spikes

When a return does not match expectations, the intervals are the best place to begin investigating. Large returns in the interval performance may be indicative of issues with the underlying data. Common circumstances that cause interval performances spikes include:

• Missing price data for a position.
• Incorrect market values for credits or debits.
• Journal, credit, or debit transactions where flow transactions (deposits, withdrawals, receipts, transfers) should have been received instead.
• Dividends received after a large outflow.
• Dividends received for a security after the position had been completely sold out.
• Corporate actions.

It is possible for extremely large performance numbers to be accurate; however, it is always best practice to investigate these spikes.

It is important to remember that each interval is based on the specific level (position, sector, asset class, account, or group) values at the beginning and end of the day. An underlying level’s interval return will exhibit different performance behavior than the interval return of the larger level it is a part of (ex. asset class and account). This is examined in greater detail in the More Information examples.

Individual daily intervals only calculate the percentage of change for that day. As a result, large capital flows can have a major effect on the starting and ending values in a level, affecting all the performance afterward.

This is particularly important when looking at a time weighted return for a period. Breaking the return periods into sections around large flows can provide a better perspective on which periods are exerting the most influence on the total return.

For more information on transaction types and their effect on performance, see Transactions and Their Effect on Performance.

Types of Returns

Time-Weighted Return (TWR)

Time-weighted return (TWR) is a performance indicator reflecting the manager’s decisions. It is a measure of investment gain or loss negating all contributions by the investor and measures growth of investment by changes in market value for each period.

The daily interval performance values are calculated based on the ending value, beginning value, and flow of each day. These interval returns are stored and then linked together to produce Tamarac Reporting’s time-weighted returns.

In other words, Tamarac uses a daily linked-IRR for our TWR methodology. Net and gross of fee options are available, as are cumulative and annualized. However, all returns for periods shorter than 12 months are cumulative.

Notice how the all of the individual daily intervals in the period have an equal weight within the TWR calculation.

Internal Rate of Return (IRR)

IRR is an absolute measurement of how the portfolio performed and represents the rate in which the net present value of all contributions and withdrawals to or from the portfolio equal zero. The size and timing of flows can greatly impact a portfolio, for example large flows at the beginning of the measured time period will have a greater effect on the overall return than smaller flows later in the period.

IRR is available in addition to TWR. IRR cannot be computed directly. The IRR must be computed using a trial and error procedure in which you “guess” an answer, plug the guess into the equation, then modify the guess depending on the results. The new guess is plugged back into the equation, and the process is repeated until a satisfactory degree of precision is achieved.

The calculation for IRR splits the return into separate periods around the flows in an account, creating a single rate of return which can be applied to each period to generate the ending market value.

We use a simple actual IRR calculation with a million iteration limit. This method is more resource intensive, but more accurate than a modified equation such as the Dietz or average capital base.

Where:

D = Days until ending date in the period

T = total days in the period from beginning to ending date

IRR = Rate of return + 1

TWR vs. IRR

The following table summarizes differences between TWR and IRR.

More Information

Sometimes we encounter situations where the performance return or Investment gain for a period does not match expectations and requires a more thorough investigation verify the results. Below are some examples of common situations and their explanations:

• TWR vs Investment Gain
• Returns vs. Underlying Returns
• Partial Period Returns (closed positions, asset classes, or accounts)
• Unmanaged Assets

TWR vs. Investment Gain

Investment Gain is the total difference between the start and end values for an account or group in a selected date period minus the net contribution for the selected date period:

End Value - Start Value - (Inflows - Outflows)

There are certain situations where TWR produces a positive return, but the overall investment dollar gain is negative and vice versa; a negative TWR with a corresponding overall investment dollar gain.

It is important to remember that TWR is a geometric mean of a daily calculation and each interval value is represented by a daily percentage return; an interval calculation is a return relative to the market value of the account on that given day.

Investment gain is a total dollar gain not impacted by the size of the portfolio but rather a cumulative dollar amount over the reporting period.

Portfolio, Asset Class, and Position Returns vs Their Underlying Returns

Tamarac Reporting is capable of calculating multiple levels of returns, including position, sector, asset class, account, and group.

A common mistake when looking at a performance report, such as the Account Performance report, is to expect the underlying asset class returns to add up to the total account return for the same period (or for account returns add up to the total group level return). It is important to remember that each level is its own separate return calculation, using its own set of intervals and is not reliant on the underlying category returns.

Since each return level is going through its own independent daily interval return calculation before those intervals are linked during the TWR return calculation for that level. The intervals used for the return calculation at one level are never mixed with the intervals used to calculate the return for levels above or below it.

Once the TWR return calculation begins in step two, combining all of the daily intervals to create the TWR return for each level, the ending TWR returns for each account will bear no resemblance to each other or the household.

This concept also applies to the account level returns and their underlying asset class level returns: While the daily starting/ending values for the underlying asset classes will equal the daily starting/ending values for the account, the daily interval returns are level specific. Each asset class will be affected differently by flows, daily value fluctuations, and corporate actions over the course of the return period, creating a unique set of daily intervals which only reflect the performance for that asset class: comparing the TWR returns from different levels on a one-to-one basis is not mathematically sound.

Partial Period Returns (Closed Positions, Asset Classes, or Accounts)

Closed accounts and assets not held for the full performance reporting period still impact performance at their level, though they may not appear as line items depending on your report settings: with the introduction of the enhanced performance calculation, closed accounts and partial period returns can now be enabled for both dynamic and PDF reports.

In the dynamic Account Performance report, the Only show returns for positions held at the end of the period check box controls whether securities no longer held will appear. These positions are marked with an *.

In the PDF report section Account Performance, the Include closed accounts check box under the General section controls whether closed accounts have their returns listed as line items.

Unmanaged Assets

Any securities identified at the account level (or at the global security level) as excluded from performance will not affect asset level performance. However, cash dividends received from excluded securities will affect cash performance in an account and appear as flows.

Glossary

Transactions and Their Effect on Performance

For more detail, see Summary Report Data Point Calculations.