At Endowus, we prioritise transparency. We want you to clearly know your returns after all fees. We believe that a better grasp of your portfolio's performance helps you track the progress of your financial goals, leading to smarter investments and better outcomes.
All returns reported are total return figures, meaning they account for all forms of income from the investments. We do not include your cash balance(s) in our return calculations.
Rates of return for your portfolio
At Endowus, we provide 4 different rates of return for you to best track the performance of your investments:
- Simple return
- Time weighted return
- Modified Dietz return
- Internal rate of return
Each methodology has its own benefits and blindspots. In addition, the choice and interpretation of each methodology would only matter when there are cash flows in and out of your investments. Otherwise, all four methodologies would produce the same result.
Simple return
Simple return is a straightforward method that calculates the percentage change in the value of your investment over a given period of time.
Simple return = (Ending value - beginning value - net cash flow) / (Beginning value + net cash flow)
Simple return is easy to calculate and understand, making it useful for short-term investments with no significant cash flows. However, it does not account for the timing of cash flows and can produce misleading results if there were significant cash inflows or outflows.
Time-weighted return
Time weighted return eliminates the impact of cash flows on the return figure, providing a measure that reflects the performance of the investment strategy itself.
This is the best metric for evaluating the performance of different portfolios or funds on a like-for-like basis because it eliminates the distorting effects on growth rates created by inflows and outflows of money.
It is calculated by breaking the investment period into sub-periods based on cash flows, calculating the return for each sub-period, and then compounding these returns.
Modified Dietz rate of return
Modified Dietz rate of return is a simple version of money-weighted return. It considers the size and timing of cash flows, and provides a more accurate estimate of the return experienced by the investor compared to time-weighted return.
It is calculated by dividing the gain or loss in value, net of external flows, by the average capital over the period of measurement.
It is used as a good approximation for the internal rate of return method and has been preferred by investors due to the simplicity of its calculation when compared to internal rate of return. However, if the flows and rates of return are large enough, the results of the Modified Dietz method will significantly diverge from the internal rate of return.
Internal rate of return
Internal rate of return is the most precise measurement of money-weighted return. Again, it considers the size and timing of cash flows, and provides the most accurate return experienced by the investor. Unlike the Modified Dietz rate of return that is based on a simple rate of interest principle, the internal rate of return applies a compounding principle.
On Endowus platform, simple return, time-weighted return and Modified Dietz rate of return are reported in cumulative terms, meaning they represent the total return over the entire period. Internal rate of return is annualised, providing the average annual return over the investment period.
Let's consider an example with the following cash flows:
Beginning Value: $10,000
End of Year 1: $12,000 (no cash flow)
End of Year 2: $15,000 (with a $2,000 contribution at the beginning of Year 2)
End of Year 3: $18,000
Simple return
The ending value is 18,000, and starting value is 10,000, and the net cash flow is 2,000. The cumulative simple return for the three years of the investment is: (18000-10000-2000)/(10000+2000)=50%
Time weighted return
Year 1 return = 2000/1000 = 20%
Year 2 return = 1000/14000 = 7.14%
Year 3 return = 3000/15000 = 20%
The cumulative time weighted return for the three years of the investment is:
(1+20%)*(1+7.14%)*(1+20%) = 54.2%
Modified Dietz rate of return
Here, we will weigh the cash flow in the denominator. The cumulative Modified Dietz rate of return over the three years of investment is:
(18000-10000-2000)/(10000+2000*⅔ )=52.9%
Internal rate of return
Using an IRR calculator, we find the IRR for the given cash flows:
IRR ≈ 15.3%
This compounds to 53.4% in three years of investment.
In the above example, we can see that:
- Simple return failed to provide an accurate picture for either investment return evaluation or personal return evaluation. This is due to the positive cash flow in year 2. Simple return fails to adjust for the timing of the cash flow.
- Investor’s personal rate of return, represented by the Modified Dietz rate of return or internal rate of return, is lower than the investment return as represented by the time-weighted return. This is because the positive cash inflow was followed by a year of relatively weak performance; the timing of the cash flow was poor, dragging down investor’s overall performance.
- There is discrepancy between internal rate of return and Modified Dietz rate of return, with the latter being an approximation of the former.
Where are the return numbers shown?
Dashboard
On your dashboard, you’ll see the Dollar value of your investment returns and the simple return %
The Dollar value of your investment returns is calculated by taking into account your investment gains and losses. This includes
- Market impact,
- Dividend reinvestments
- Currency impact
- Endowus fees
- Distributions paid out to you and
- Other cashflows such as Cashback received
12-month rolling returns
The 12-month rolling returns of the portfolio show representative statistics of the fund or portfolio’s performance over a 12-month / one year period. This helps us to assess and communicate both the risks and potential returns associated with the fund or portfolio.
To calculate this, we look at the portfolio’s historical performance and divide it into 12-month rolling periods (for example Dec 2006 to Nov 2007, Jan 2007 to Dec 2007, and so on). We then identify the highest, lowest and average performing 12-month rolling returns.
Risk Metrics
Max drawdown
While our portfolios are created with the best-in-class fund management companies in the income investing space, there is still risk involved and investments are not capital guaranteed.
Understanding the historical maximum drawdown of the respective portfolio can be a good way to assess whether the portfolio is suitable for your risk appetite. Historical maximum drawdown is the fall from the peak (the highest point) to trough (the lowest point) in investment value, based on historical performance.
Investors may use the historical maximum drawdown as an indication of the maximum loss they may have experienced by investing in the specific portfolio over a period of time.
Please note that the drawdown figure is based on historical performance, which may not be indicative of future performance. There is always the risk that the latest maximum drawdown will be overtaken by a new maximum drawdown in the future. Investors should therefore view the historical maximum drawdown as a reference point and not a guarantee of future maximum drawdown.
Volatility
Volatility indicates the extent to which prices fluctuate over time. It is commonly measured by the standard deviation of returns, which quantifies the variation in investment returns. High volatility means the investment's price can change dramatically over a short period, while low volatility indicates more stable prices.
Awareness of your investment’s volatility is important as it represents the risk associated with that investment. An investment with low volatility suggests more consistent returns whilst a higher signifies greater risk and potential returns. Thus, a lower standard deviation indicates less volatility and risk but is less likely to deliver extraordinary returns.
Here at Endowus, volatility is reported based on the annualised standard deviation of historical returns.
Consider the risk and return profiles of the examples below:
5-Year Annualised Return | 5-Year Annualised Volatility | |
Fund A | 7% | 10% |
Fund B | 7% | 20% |
Both funds achieved the same investment return in the past 5 years, averaging 7% per year. However, Fund A had a lower annualised volatility compared to Fund B. This means that investors most likely experienced greater swings in Fund B’s investment return in the past five years, despite reaching the same destination as Fund A.