Performance Calculations Overview

Internal Rate of Return (IRR)

Simple Rate of Return

Calculation

Investopedia TWR Calculation Information

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• The industry standard as well as the standard for the Global Investment Performance Standards (GIPS). This is Orion's best practice calculation method. 

• Eliminates the distortion caused by cash flows.

• Allows comparison of different money managers over a given time frame and considers management fee impact on performance

• Evaluates the desirability of investments - is it economically profitable?

• Answers the question - "How is my account doing relative to my goals?" as opposed to comparing to a benchmark or someone else's management

• Intuitively appealing - its easy math.
• "How can I calculate my own return?" Easy!
• Value Change for period/(Beginning Value + Net Positive Cash Flows for the period)

Limitations

• Very complex to calculate by hand

• Difficult to understand how specific events can have an opposite effect on performance. Ex) "My ending value is higher than my beginning value, but my TWR performance is negative?"

• Can be confusing to understand and explain to clients. Ex) IRR is positive, but TWR is negative

• Calculation is very complex and requires a formula or excel functions. The calculation becomes even more complex with addition of dividends & security sells. Charles Schwab describes it as a "guess-and-check" calculation.

• Return is influenced by the timing and size cash flows. Contributions will overstate performance and distributions will understate performance

• Overly simplified

• Easily distorted by the real-world. Ex) Time periods, new funds added to the account, etc.