What is Money-weighted Return?
Money-weighted Return (MWR) assigns a weight to each of your deposits and withdrawals. So, a deposit of $1,000 has a lesser effect on your portfolio’s return figure than a deposit of $100,000.
This approach helps to gauge the effectiveness of the individual’s timing of deposits and withdrawals. As a result, MWR may also overweight or underweight the returns you see as a result of factors unrelated to the performance of the portfolio manager and their investment strategy. It will potentially inflate your returns when you deposit while markets are going up and understate your performance when you deposit while markets are going down. It will also give your lump sum deposit performance a larger weighting when calculating the money-weighted return.
So, unless your portfolio manager determines when to deposit or withdraw funds from your portfolio, MWR doesn’t effectively measure your portfolio manager’s performance. You should only use MWR to compare two different portfolios if you have the exact same deposit and withdrawal behaviors for both portfolios.
MWR’s merit lies in that it clarifies the impact of the individual investor’s investment decisions (e.g., when you deposit and withdraw).