Archive / Investment Adviser (Level 1) / Portfolio Manager

nism-series-xa-sebi-twrr-portfolio-manager-performance-disclosure[ INVESTMENT ADVISER (LEVEL 1) ]

Which return methodology has SEBI mandated for Portfolio Managers when disclosing historical portfolio performance to clients and the public in marketing materials?

[ A ]Money Weighted Rate of Return (MWRR / IRR)

[ B ]Time Weighted Rate of Return (TWRR) for the immediately preceding three years[ CORRECT ]

[ C ]Simple Annualized Point-to-Point Holding Period Return

[ D ]Arithmetic Average Return of the last five calendar years

Takeaway

SEBI mandates that Portfolio Managers disclose historical performance using the Time-Weighted Rate of Return (TWRR), specifically for the immediately preceding three years, in marketing materials and client communications.

Derivation

TWRR removes the distorting effect of client-specific cash inflow/outflow timing from the reported number, ensuring that a performance figure disclosed to a prospective client genuinely reflects the manager's investment skill rather than being inflated or deflated by other clients' contribution timing — this uniform methodology also lets prospective clients compare different portfolio managers on an apples-to-apples basis. Restricting the mandatory disclosure window to the preceding three years standardizes how far back performance claims can be marketed, preventing selective presentation of only a manager's best historical years.

Why the others fail

A — Money Weighted Rate of Return (MWRR / IRR)

MWRR (IRR) reflects the specific timing of an individual investor's own cash flows rather than isolating manager skill uniformly across clients — SEBI mandates TWRR precisely to avoid this.

C — Simple Annualized Point-to-Point Holding Period Return

A simple annualized point-to-point holding period return is highly sensitive to the exact start and end dates chosen and does not correct for interim cash flow timing the way TWRR does — it is not.

D — Arithmetic Average Return of the last five calendar years

An arithmetic average of the last five years' returns both uses the wrong statistical method (arithmetic rather than the compounding-consistent time-weighted approach) and the wrong disclosure window.