Choosing the Right Lens: Comparing Different Methods of Investment Performance Evaluation

Chosen theme: Comparing Different Methods of Investment Performance Evaluation. Welcome! Today we explore how different performance lenses can tell surprisingly different stories about the same portfolio—and how to choose the right one for your goals. Subscribe for upcoming deep dives and share your go-to metrics in the comments.

One Portfolio, Many Stories

Maya reviewed her balanced portfolio and saw an 8% time-weighted return, a 5% money-weighted return, and a 0.6 Sharpe ratio. None were wrong; each answered a different question about skill, timing, and risk.

Start With the Question, Not the Metric

Are you judging manager skill, investor experience, or compensation worthiness? Pick the method that aligns with your objective, then supplement with complementary views. Comment with the primary question guiding your evaluation process.

Comparability, Consistency, and Credibility

Consistency builds trust. Adopting standards and documenting methods—linking returns, handling cash flows, selecting benchmarks—ensures results are comparable across time and peers. How do you document your methodology for stakeholders today?

Time-Weighted vs Money-Weighted Returns

When Cash Flows Tilt the Picture

Money-weighted return (IRR) captures the investor’s lived experience by incorporating the timing and size of contributions and withdrawals. Big deposits before downturns or withdrawals before rallies can materially sway this result.

Isolating Skill With Time-Weighted Return

Time-weighted return neutralizes external cash flows to spotlight the manager’s decision quality. If you want to compare managers fairly, TWR is often the cleanest measure. But remember, it may diverge from clients’ felt outcomes.

Use Both, Reconcile, and Explain

Present TWR for skill assessment and MWR for client experience. Where they differ, explain the cash-flow story. Invite questions from clients about their deposits and withdrawals to align expectations and behaviors.

Benchmarking and Alpha: Picking the Right Yardstick

A dividend strategy compared to a broad growth index can generate illusory alpha or unwarranted underperformance. Mis-specified benchmarks mislead decisions, bonuses, and allocations. Align exposures first, then judge added value.

Benchmarking and Alpha: Picking the Right Yardstick

Classic CAPM alpha adjusts for market beta. Modern models add size, value, momentum, quality, and more. Factor-adjusted alpha tests whether returns exceed exposure to systematic drivers. Which factors dominate your universe?

Brinson-style attribution separates sector or asset allocation from security selection. Overweighting energy might help, yet poor stock picks within energy can offset gains. Disentangling these helps reward the right decisions.

Decompose returns into exposures to value, size, momentum, quality, and low volatility. Discover whether success came from intended bets or unintended tilts. Which factor exposures surprised you in your latest report?

Multi-period linking avoids misleading period-by-period wins masking long-run underperformance. Use arithmetic for interpretability and geometric for consistency with linked returns. How do you present attribution to non-technical stakeholders today?

Maximum drawdown and time to recovery capture pain that averages hide. A 20% fall feels different than a choppy 8% volatility. Discuss drawdowns early to prevent panicked decisions later.

Drawdowns, Downside Risk, and Sequence Matters

Private Markets: IRR, TVPI, and PME Reality Checks

IRR assumes interim cash flows reinvest at the IRR itself, often unrealistic. Early distributions can inflate optics despite modest total value creation. Scrutinize cash-flow timing, not just the headline percentage.

Private Markets: IRR, TVPI, and PME Reality Checks

Public Market Equivalent benchmarks private cash flows against a tradable index. It asks: did your private bets beat a liquid alternative with the same timing? Share your preferred PME variant and index.

Communicating Results: Clarity Over Complexity

Translate metrics into outcomes: what risks were taken, which decisions drove results, and how performance fits the plan. Avoid jargon walls. What one sentence would you want clients to remember?

Communicating Results: Clarity Over Complexity

Blend cumulative return charts with drawdown curves, attribution bars, and factor exposures. Show both peaks and valleys. Which visualization best helped your audience embrace uncomfortable but necessary truths?