Every dollar counts
As an experienced financial adviser, with over 15 years in the industry assisting and supporting many self-directed investors, I’m always stunned to learn how few investors actively measure the performance of their portfolio. By measuring performance, I don’t mean looking at your 30 June value, dividends receives, or comparing CSL Ltd’s (ASX:CSL) price today to that when you bought for $2 at float; I mean the actual returns you have delivered from hours of analysis for your family. It’s also important to understand where they have come from, currency, growth or dividends. Taking stock and having a formal policy review is not only good practice in this environment of heightened volatility, it’s also a requirement as a trustee of an SMSF according to the legislated Investment Strategy document.
Whilst it has taken some time to understand the inner workings of return calculations from time weighted to internal rates of return, it is clear that the latter is the most useful and accurate. Time weighted returns or TWR are typically used by fund managers to provide comparative performance of the underlying performance of their funds, but excludes the impact of cash moving into and out of the fund; thus avoiding ‘cash’ drag and ensuring the performance is comparable to the index or any other fund. Internal rate of return on the other hand, involves measuring the performance of every individual investment in a portfolio, including cash and places greater importance on the timing of investments; something that is controlled by all SMSF investors. IRR is thus more useful for self-directed investors because it tracks the performance of actual dollars investors over a period of time.
That’s enough of the definitions and background. Through my entire history in financial services, excluding a short period at the Commonwealth Bank, we have reported IRR’s to our clients on a quarterly basis. Whilst very short-term, we explain it as providing all the tool’s and transparency to ensure we are doing our job well. For us, IRR’s are incredibly easy to calculate, there are no spreadsheets, just an extensive amount of data and the use of a Portfolio Management System called XPLAN, which is issued by IRESS Ltd (ASX:IRE) an Australian leader in the space. After deciding to write on this topic, it became evident how difficult it is to find software that offers an IRR calculation that is publicly available at a reasonable cost.
The first option, which is typically reserved to the retired engineers and maths teachers, it to set up your own Excel spreadsheet and then track down the daily transactional and pricing data for every fund, ETF, bank account and share in your portfolio. Clearly that is too much work for most people. After a few hours googling, I stumbled onto a number of groups who appear to be offering a reasonable service, Stocklight and Sharesight, importantly I do not personally use or have any interest in either. Importantly, it appears that both allow the inclusion of managed fund and traditional share investments and utilise a money weighted or IRR return rather than the TWRR noted above.
In coming months I will take the opportunity to look a little deeper into each option amid what is likely to be an important period for understanding the drivers of returns as volatility remains at heightened levels.