A COMPARISON OF VALUE- AND TIME-WEIGHTED UNIT
Date
2011-04-12
Authors
Gerber, Eugene
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Abstract
Unit trust returns are published and quoted regularly in various media publications.
These returns, calculated as Time-Weighted Rates of Return, do not reflect the
actual returns that investors perceive. The timing of capital flows into and out of the
funds affects the real returns that investors experience, and can be calculated using
Value-Weighted Rates of Return, also referred to as Dollar-Weighted Rates of
Return.
This research report compared the Dollar- and Time-Weighted Rates of Return for 60
South African unit trusts from the second quarter of 1998 to the second quarter of
2005. The actual returns were compared to expected returns based on random
capital flows, and to returns based on constant and inflation linked capital flows.
If investors were creating superior returns by moving capital into and out of a unit
trust during periods of positive and negative returns respectively, then they will have
an actual return that is higher than the published return of the fund, i.e. the Dollar-
Weighted Rate of Return will exceed the Time-Weighted Rate of Return.
The findings indicate that investors are destroying value by actively timing their
capital flows. The research also showed that a large percentage of the general
investor community would have perceived larger returns by following a constant
investment strategy.
Description
MBA - WBS
Keywords
Unit trusts, Unit trusts returns