Hi I am currently looking at the money weighted rate of return and time weighted rate of return. Both of which exclude investment income from their cashflows when being calculated. I am slightly confused as to why this is - would the investment income, say some dividends on a bunch of equities, not lead to increase the investment performance and hence should be included in some manner? Or is it as the investment income is completely withdrawn from the fund upon receiving it that it is excluded. The past paper question which made me consider this is ST5 September 2014 Question 6 where both the MWRR and TWRR have investment income excluded in cashflows, but for the index return we have to calculate the dividends and include this in the return for the index. Any help would be greatly appreciated and thank you in advance.
Hi, We need to be a little careful here. The investment income is inherent within the fund values and so by using the fund values we are including investment income. What we are stripping out separately under both methods is the contribution income (external cashflows). Again these are included within the fund values, but in each period we are working out a return for we want to exclude them as we would not want a large cash inflow (outflow) to make it look as though the manager has performed well (badly). Hope this helps. Joe
Hi Joe Thanks very much for your response. That all makes good sense and I would understand how to do the question now. My only slight confusion, which we possibly don't need to consider, is when you say the investment income is inherent in the fund, how do we know this? Is this something which is always the case, or perhaps there is an underlying assumption I'm missing saying all investment income is immediately reinvested hence is inherent in the fund?
This would be our default assumption yes that money coming in is immediately invested. It's not an assumption that the examiners need spelling out but for your peace of mind you could mention it. Normally the assumption we have to make is when that income is received (at the start, in the middle or at the end of the period) but in this case the examiners have helpfully told us that it's the end of each period.
