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September 2007

  • Thread starter Little Miss Actuary
  • Start date
I think it would have been a mistake to talk about TWRR and MWRR. To me this is just jargon. This is not what we were asked to talk about.

The reason for the misunderstanding was down to the customer's wrong assumption about payments being uniform, and the market conditions varying throughout the year. I feel quite strongly that any mention of MWRR & TWRR is an attempt to unnecessarily educate the public. And we all know the rule about educating the public don't we?

Q2 was much easier. It should have been a 60/40 split and not 50/50.
 
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I agree with Avanbuiten. I avoided talking about MWRR and TWRR and thought that the trustee didn't need to know what they are. I just guided him to how he could prove for himself that the investment manager's calculations are correct and that he did outperform the benchmark.

But, in the end, only time will tell whom of us were right!
 
I initially thought in these lines and ommitted mentioning of TWRR and MWRR. But then I sort of convinced myself that it wasn't a member of general public we were supposed to address. The person addressed was a trustee who is normally relatively more technical and can undertand and will be interested in different rates of return.
 
I agree not to have mentioned TWRR/MWRR. As to "him" being a trustee member - in my experience, treat everyone as member of public ie. laymen terms unless they say for example your manager etc.

No point in discussing this topic too much further though ;)
 
cricketer said:
I initially thought in these lines and ommitted mentioning of TWRR and MWRR. But then I sort of convinced myself that it wasn't a member of general public we were supposed to address. The person addressed was a trustee who is normally relatively more technical and can undertand and will be interested in different rates of return.
Click to expand...

I agree here. I spent over 30 mins planning the letter (in comparison it took less than 10 mins for q2) as i could not decide what to include. Without the twrr and mwrr parts, getting close to the word count would have been very difficult.
The trustee did have some good (!) mathematical knowledge and was asking for more info. I did make sure i explained rather than stated a definition of twrr.
 
avanbuiten said:
I think it would have been a mistake to talk about TWRR and MWRR. To me this is just jargon.
Click to expand...

I agree that any explicit mention of either MWRR or TWRR will be interpreted as jargon, however, I think an explanation of how these measures differ was key to answering trustee's query as this was the source of the confusion.
 
obri600 said:
I agree that any explicit mention of either MWRR or TWRR will be interpreted as jargon, however, I think an explanation of how these measures differ was key to answering trustee's query as this was the source of the confusion.
Click to expand...

The twrr and mwrr gave the same answer to one decimal place. E.g 7.3% (1 d.p.). I'm don't think it was necessary to explain the difference given this difference is neglible. Only time will tell though.
 
Twrr/mwrr/nothing

I do not agree with you guys ssaying that we shoudl not have mentioned TWRR/MWRR.

From the letter he wrote, we could clearly see that the trustee was mathematically aware and had some financial knowledge. So, we should have made sure that the pitch of the letter was at thr right level. He understood most of the things that were going on in the scheme, apart from his assumptions.

His main concern was that according to his calcs, the IM had underperformed, and he wanted to know why his calcs were not producing the same result as the Im's one.

underperformed on a mwrr basis yes, but not on a twrr basis. AvanB, we were giev nthe manager's twrr, so no need to calculate it.

so I cannot see any other way of explaining the difference between the two without twrr and mwrr. Besides, the BM was based on TWRR, and i think that should have been mentioned that this is one of the reasons for using the IM's measure ie TWRR, to avoid any inconsistencies. Also the TWRR allows us to see how skilled the manager is as it shows how much money he has been able to generate with the funds that he has been given, ie no cash inflow or outflow.

And the second part of the answer, about the effect of contrib patterns and inv conditions - we do need to use TWRR and MWRR to explain what the effect is.

I think that you should have a look at specimen paper 05 which had a similar type of question. Clearly uses TWRR and MWRR.

word count has let me down, and no illusions from my part, it's going to be FA/FB.

anyway, thats my view (may be biased! :) )
 
I am sorry, Little Miss Actuary, but you didn't include the question paper, which explicitly instructs you to discuss the difference between MWRR and TWRR. Don't beat yourself up over the paper. You never know with this exam whether you'll pass or fail. There is more than one way to answer the question given.

I agree that the difference between the 2 rates is negligeble for Sep2007. I think the clue to not going into the difference between the rates was exactly the fact that they gave the same answer.
 
Here is a link to the old question paper:

http://www.actuaries.org.uk/files/pdf/pastpapers/2004apr/201x_a04.pdf

They even give you the formula for MWRR & TWRR in this old paper, just in case you can't remember. For this old paper I would have mentioned the two returns.

I hope the examiner will accept alternative solutions as this seems to be a dividing issue. I still stand by my initial statement.

Anyway, even if it was wrong to mention MWRR and TWRR, and you did, if the rest is ok you can still pass!
 
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i spent half an hour trying to remember the difference between TWRR and MWRR. having finally stumbled upon a moment of inspiration, i wasn't going to leave that exam hall without sharing my eureka moment with someone, so my little trustee friend was the lucky beneficiary. i also convinced myself that by not doing so would be patronising to the little busybody gimp, so i let him/her/it have the whole twrr/mwrr shebang - hook, line and sinker.

anyway, as a famous actuary once said, there's more than one way to skin a cat.
 
Erik said:
I am sorry, Little Miss Actuary, but you didn't include the question paper, which explicitly instructs you to discuss the difference between MWRR and TWRR.
Click to expand...

Even so, if it's ok to explain these terms to a "friend" in that paper (in an informal letter) why would it not be ok to a trustee who obviously had some mathematical knowledge? It's too late now anyway :(
 
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Little Miss Actuary said:
Even so, if it's ok to explain these terms to a "friend" in that paper (in an informal letter) why would it not be ok to a trustee who obviously had some mathematical knowledge?
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Both methods gave the same result, it doesn't matter which calculation you use, the answer will still be the same.
 
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This is my last post under this thread until exam results are out!

The reason why the trustee got a different answer is not due to the difference between the two measures, but because of the time periods used. The two measures give the same answer! So why would you discuss their differences? I just think writing down the definition and differences of the measures didn't address the rather clear instruction of the exam question.

I would really like to know what Acted thinks about this, now that the papers have been published.
 
Will any Acted tutor be brave enough to post an opinion before the solutions are published?

Don't be frightened if your opinion ends up being wrong. No one will think any less of you.
 
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Erik said:
The reason why the trustee got a different answer is not due to the difference between the two measures, but because of the time periods used
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I don't think this is right.

The MWRR and TWRR for the fund were the same in each quarter but not the same over the whole year. The MWRR was 7.1% for the whole year (approximately) whereas TWRR was 8.0%. This difference arises because TWRR ignores timing and amount of net cashflows into the fund. The trustee is trying to compare a MWRR with a time-weighted benchmark return which is an invalid comparison.

Therefore, need to discuss differences to explain why trustee has drawn different conclusion to fund manager.

I also would like to hear ActEd's view on this thread!
 
cheers obri

erik had me worried there that i'd made an even bigger hash of it than i originally feared!!
 
HI

My turn!lol

Before i continue, i draw your attention to some notes form ST5 - (ST5 - CHAPTER15 PAGE 3 onwards in paticular page 8, where it states that MWRR is an absolute measure of return, but not good basis for comparing two managers as influenced by timing size of cashflows etc...)

-i have copied the CA3 question below from the paper so we can refer to it (now on teh website)

"Draft a letter in about 500 words to the member trustee explaining how the investment manager's performance compares with the benchmark, and how the investment return has been affetced by pattern of payments and fluctuations in investment conditions"



interpretation - it seems two clear tasks ( (1) & (2) below ) asked to address here

1) Investment performance

- trustee quoted Managers MWRR
- Is affected by payments in and out of scheme
- returns poorer in 2nd half, but higher in 1st half
- most money invested in 2nd half of year when stock market returns poor
- MWRR would have been higher if most money invested in 1st half

- as MWRR influenced by timing+ size, is not good for comparing managers performance with benchmark


2) Comparison with benchmark

- trustee compared mangers MWRR with benchmark TWRR
- not like for like
- compare TWRRs as unaffected timing /size payments
- both comparable (mangers TWRR slightly higher)
- manger slightly outperformed benchmark (when returns on like for like basis)

ok i didnt do exactly this in exam, but on reflection i would have done something like this, and explained with example how MWRR is affected by timing size etc with the intro + conclusion etc....

can someone educate me on my errors of interpretation? (PS dont be scared to tell me how wrong I am, it is only an exam, & i am not going to sink into some depressive state over how far out i may be etc, i would actually like to learn for future)
 
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obri600 said:
The MWRR and TWRR for the fund were the same in each quarter but not the same over the whole year. The MWRR was 7.1% for the whole year (approximately) whereas TWRR was 8.0%. This difference arises because TWRR ignores timing and amount of net cashflows into the fund. The trustee is trying to compare a MWRR with a time-weighted benchmark return which is an invalid comparison.
Click to expand...

I think Obri has hit the nail on the head. The transfer value half-way through the year means that the MWRR puts more weight on the poor returns in the 2nd half of the year - a bit unfair on the fund manager who can't control the cashflows. So the TWRR is arguable fairer for a comparison with the benchmark. Both measures are valid and trustees should be aware of both, but TW a better comparison with benchmark.

I probably wouldn't use the phrases TWRR or MWRR in my answer. Just talk about two measures and say why they are different (allowing for cashflows or not).

If you're feeling depressed about Q1, remember that there was a Q2.

Darrell
 
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