Each bank produces its own performance report, in its own format, with its own calculation assumptions. When a family manages its wealth across several institutions, rigorously comparing these figures is a delicate exercise. This article explains the two most widely used performance measurement methods — TWR and MWR — and provides the keys to interpreting benchmarks and identifying hidden fees.
Time-Weighted Return (TWR): measuring the manager's performance
The Time-Weighted Return (TWR) measures a portfolio's performance by neutralising the impact of capital flows — contributions and withdrawals — that the manager does not control.
To calculate TWR, the analysis period is broken into sub-periods delimited by each cash flow. The performance of each sub-period is calculated independently, then sub-period returns are linked geometrically. The result is a return that reflects only the manager's decisions, independently of the timing of investments.
Why is TWR the standard for comparing managers? Because it enables comparison of two managers operating over the same period with different cash flows. The CFA Institute's GIPS standards recommend TWR for all performance presentations to clients.
Simplified example: you invest CHF 1 million in January. By June the market has risen 5%. You withdraw CHF 500,000. By December the market rises a further 5%. Your TWR is (1.05 × 1.05) − 1 = 10.25%, regardless of your withdrawal.
Money-Weighted Return (MWR): measuring actual enrichment
The Money-Weighted Return (MWR), also known as the Internal Rate of Return (IRR), measures the investor's performance — that is, the actual growth of your capital, taking into account the timing of your cash flows.
Unlike TWR, MWR is sensitive to when you invest and withdraw capital. If you invested a large sum just before a market decline, your MWR will be lower than the manager's TWR. If you invested ahead of a rally, your MWR will be higher.
The practical rule:
- Use TWR to evaluate your managers and compare their performance to a benchmark.
- Use MWR to measure your personal enrichment and understand what you actually earned on your capital.
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Benchmarks: measuring against what?
A performance figure only makes sense relative to a reference point. Choosing the right benchmark is a strategic decision.
Common benchmarks:
- Equity indices: Swiss Market Index (SMI), MSCI World, MSCI Emerging Markets
- Bond indices: Swiss Bond Index, Bloomberg Global Aggregate
- Mixed benchmarks: composite reference portfolios (60% equities / 40% bonds)
- Absolute benchmarks: CHF SARON + x%, or inflation + x% — used for absolute-return mandates
A frequent trap: comparing a defensive portfolio (60% bonds) to a pure equity index. The apparent underperformance is an illusion — the risk taken is fundamentally different. A relevant benchmark must reflect the risk profile of your mandate.
Cross-bank comparability: when comparing the performance of two banks on your wealth, verify that they use the same calculation method (TWR or MWR), the same perimeter (fees included or excluded), the same reference currency and the same benchmark. Without these checks, comparison is unreliable.
Fees: net performance is the only one that matters
A portfolio's gross performance — before fee deduction — is a misleading indicator. What matters is net performance, after all costs have been deducted.
Layers of fees to identify:
- Management fees charged by the manager or bank (often 0.5–1.5% per annum)
- Custody fees
- Transaction costs (commissions on purchases and sales)
- Fund TER (Total Expense Ratio of funds or ETFs held in the portfolio)
- Foreign exchange costs (spreads on transactions in other currencies)
- Retrocessions paid by funds to the manager — normally disclosed under FinSA
A fee difference of 0.5% per annum compounded over 20 years represents a performance differential of approximately 10% for a standard diversified portfolio. This impact is considerable and justifies rigorous analysis.
How Ridger helps you read your reports
Ridger receives each bank's reports and consolidates them into a uniform format, enabling rigorous comparison. This consolidation includes:
- Normalising the calculation method (TWR consistently applied)
- Decomposing fees by institution and by layer
- Comparison to a benchmark consistent with the overall risk profile
- Highlighting material performance differences between managers
This consolidated reading gives you a clear and independent view of each manager's quality. To learn more, we invite you to a confidential meeting.