MAAKL's Money-Weighted Rate of Return (MWRR).

Have you ever wondered why your unit trust managers sometimes report award-winning fund performance figures for investments that you own in your portfolio and yet your own actual returns fall short of those numbers? Some  explanation might help you to understand the difference.

If you had invested a lump sum at the beginning of the year and did not add or redeem your investment, your return would be the fund’s return minus the service charge you paid. That’s simple and straightforward.

John invested RM120,000 on 1 January 20XX. At the end of the year, the market value of his investment was RM144,000. Your investment return is 20% as reported by the Fund Managers. 

However, in practice, you do not tend to sink in your entire investment on the 1st January,  but rather  you invest different amount at ad hoc or regular intervals throughout the year. In such situations, computing the rate of return becomes far more complicated Thus if you have invested the same RM120,000 on a monthly basis of RM10,000 per month,  and the profit generated are the same as above of RM144,000,  you will realise the true rate of return cannot be the same as the single lump sum invested at the start of the year as the unit price tend to flactuate over a period of time.

The MWRR is a measure of the client’s portfolio returns. It is calculated by finding the rate of return that will set the present values of all cash flows and terminal values equal to the value of the initial investment. In other words, it takes into consideration all investments and redemptions in calculating the rate of return of a unit trust portfolio.

 MWRR makes it easy for you to compare your unit trust portfolio’s returns against other investment

Finding Value

The concept of valuing a unit trust fund is fundamentally different from valuing a company.  One fundamental difference is that the prevaling market price of shares are based upon the demand and supply of the shares whereas for unit trust fund, the demand (new investments) or redemption (withdrawal) does not affect the Net Asset Value (NAV) of the unit trust fund.  The NAV is valued based on the value of the underlying net assets adjusted for accrued management and trustee fee, the underlying assets being value of the companies held in the unit trust portfolio.

Thus whether a particular fund represent good value is based on the shares held in the portfolio.  It is the primary function  of the Fund Managers/Investment Managers to undertake necessary analysis and manage the portfolio by including stocks that will appreciate in value in accordance with the  funds investment objective.  Remember, the value of the unit trust will appreciate or depreciate based on the market value of the underlying shares on a daily basis. 

How do You do Asset Allocation

Studies have shown that somewhere between 77% and 94% of the variability in portfolio returns are determined by asset allocation. So our goal is to use asset classes with low correlation to get the best reward/risk ratio. One of the most popular examples of assets that have low correlation is stocks and bonds. Accordingly, adjusting your ratio between stocks and bonds is one of the most basic ways to adjust the amount of risk you wish to take in a portfolio. The chart below shows the risk/return trade-off between bonds and stocks for 1980-2004. The stock portfolio is represented by the S&P 500 index, while the bond portfolio contains 60% five-year Treasury notes and 40% long-term Treasury bonds. The portfolios range from 100% bonds, to 95% bonds/5% stocks, 90% bonds/10% stocks, all the way to 100% stocks.

It’s interesting to note that being 40% stocks/60% bonds actually ends up with the same level of risk, but almost 2% more in average annual return. I think this is a big part of why you won’t see many model portfolios with more than 60% bonds. Also, I would note that as you get near 100% stocks, the slope of the curve gets flatter and you start taking on more risk without getting as much higher return.

Risk & Time Horizon

The time horizon over which you will build up and hold your investment, a period likely to be determined by your age, play a significant part in how you allocate your  portfolio.  If you are in your 20s and 30s investing for retirement or put your child through higher  education, you should preferably invest in Equity Fund as your holding period will be 20 years or more. If you are nearing retirement, you should invest substantially in Bond Fund which gives a predictable return.