TWR Reports and Your Portfolio Management Software

During the production of our quarterly reports earlier this month, I discovered an interesting property of our portfolio management software (PMS), dbCAMS+. The reports delivered to clients include a variety of information including a report showing the time weighted rate of return (TWR) for asset classes and the portfolio as a whole.

TWR Primer

Essentially a TWR report eliminates the effect of cash flows into and out of an investment and simply identifies the return of the underlying asset. Since cash flow is negated, TWR has become a useful measure when comparing investment managers’ performance, as they cannot control the inflow and outflow of cash within their managed assets.

To calculate TWR, the rate of return between two cash flow events must be identified, and all of the rates of return are multiplied together to find the TWR for the period in question. If there are no cash flow events during the period being examined, the TWR is simply the rate of return calculated using the starting price and ending price for the period. A good article with more information on TWR with specific formulas (and how it is different from IRR) can be found by clicking this link.

TWR in dbCAMS+

So where am I going with all of this? In order to calculate TWR, one needs price information for each cash flow event that occurs during the period in question. Again, if there are no cash flow events during the report period, only the opening and closing prices are needed. However, I found this concept doesn’t entirely hold true with dbCAMS+.

Deep down in the dbCAMS+ help file is a short sentence about TWR calculations (my emphasis added in bold):

The first sub-period runs from the begin date to the first cash flow point, the end of the month, or the end of the date range whichever comes first. The second sub-period runs from this date to the next cash flow point, the end of the month, or the end of the date range whichever comes first. This process continues until the last sub-period is determined. The last sub-period must have the end of the day on the last date in the date range as its end point.

The caveat here with dbCAMS+ is when the period of a TWR report extends beyond the end of any month (i.e. a quarterly report!). If a security does not have a price for the end of the month, dbCAMS+ cannot calculate a TWR. It requires that a price for the security exists for the end of the month, even if there are no cash flow transactions for the security!

Price Requirements

The need for monthly prices is typically not a problem for most advisers, as most data is obtained through the vendor interfaces which includes prices in addition to the transaction and balance information. But for those products that don’t provide price data through the dbCAMS+ interface, such as some no-load variable annuity products, what is an adviser to do?

The byproduct of the price requirement for TWR calculations means that advisers need to ensure that prices are added to the dbCAMS+ price table. This likely means additional staff time required at the end of each month to obtain price information and manually add it to dbCAMS+ (or by learning how to use the Generic interface to perform the task with some programmatic approach). Alternatively, advisers can utilize data aggregation tools such as ByAllAccounts or DST FAN Mail to obtain prices and import them into the PMS program.

The Takeaway

Keep this interesting byproduct in mind when evaluating PMS programs. Not all programs require a minimum of one price per month in order to calculate a security’s return. A monthly price requirement is not necessarily a bad thing, but advisers need to be aware of what data is required in order to generate error-free reports. So be sure to ask PMS vendors the price requirements in order to produce certain performance reports.