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Dubai, United Arab Emirates

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The Family Office Co. B.S.C (c) is licensed as a category 1 Investment Firm by the Central Bank of Bahrain C.R.No.53871 dated 21/6/2004. Paid Up Capital: US$ 10,000,000. P.O. Box 18024, Manama, Bahrain.

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Understanding Time-Weighted Return (“TWR”)

Time-Weighted Return (“TWR”) measures an investment’s performance by neutralizing the impact of cash flows, such as contributions and withdrawals. This approach ensures that TWR captures the core performance of the underlying assets by calculating returns across sub-periods without reflecting cash flow timing. TWR is often recommended for assessing the performance of an overall portfolio, especially in cases where cash flows vary due to client decisions or market timing.

By providing a consistent measure across varying time frames, TWR allows for a clearer view of how investments perform over time, unaffected by cash flow influences.

Internal Rate of Return (“IRR”) and Its Applications

The Internal Rate of Return (“IRR”) measures the growth rate of an investment, considering the timing and size of cash flows. This makes IRR particularly valuable when assessing the return on a single investment or a specific deal, where the timing and amount of cash flows are critical factors in measuring growth.

However, IRR may sometimes reflect the influence of cash flow events more than the underlying asset performance, which can be misleading in long-term assessments. For instance, significant deposits or withdrawals can create fluctuations in IRR that may not represent the portfolio’s core growth.

Balancing TWR and IRR for Comprehensive Reporting

At The Family Office, both TWR and IRR are used, depending on individual portfolio characteristics and financial goals. Here’s how each metric serves different purposes:

Scenario Analysis: How to Use TWR and IRR

To illustrate the practical applications of TWR and IRR, consider three hypothetical scenarios:

These examples demonstrate that TWR and IRR provide complementary insights, with TWR offering stability unaffected by cash flow timing and IRR capturing cash flow impacts.

Choosing the Right Metric for Your Financial Goals

In helping clients achieve long-term financial goals, The Family Office utilizes both TWR and IRR to ensure a comprehensive view of their portfolio performance. While TWR may be favored for its consistency over time, IRR also adds value when assessing specific deals or investments, where cash flow timing and size are crucial to understanding growth. By leveraging both metrics, The Family Office provides clients with a holistic perspective on how their investments perform.

Choosing the right metric to evaluate investment and portfolio performance can help investors make well-informed decisions. While IRR plays a crucial role in assessing the impact of individual cash flow events or specific investments, TWR provides a broader view of overall portfolio performance. For The Family Office’s clients, both metrics offer valuable insights, enabling effective tracking of investments and supporting confident, future-focused decisions.

To learn more about how TWR and IRR can enhance your understanding of your portfolio performance, connect with The Family Office for a personalized consultation on our approach to wealth management.

The results shown in the above case study, such as the potential doubling of a $100,000 investment, are hypothetical examples and are subject to market risks and fluctuations that may affect outcomes.

The scenarios shown assume specific cash flow patterns, reinvestment rates, and market conditions. These factors can vary in real-world situations, and deviations may significantly impact the returns.

Investments are subject to risk and volatility and returns like those in the scenarios provided also carry an associated level of risk. Positive returns shown here may not always align with real-world results, especially in volatile markets.

Past performance is not indicative of and does not guarantee future performance. Exit timelines, prices and related projections are estimates only, and exits could happen sooner or later than expected, or at a higher or lower valuation than expected, and are conditional, among other things, on certain assumptions and future performance relating to the financial and operational health of each business and macroeconomic conditions.

TWR vs IRR: Choosing the Right Measure for Portfolio Performance

Fundamentally, the global economy is in a more optimistic state than many might have dared to hope a few years ago.

Recession has been avoided in major economies, the battle with inflation has seen major progress, and the markets have so far adjusted to the various geopolitical crises. In particular, analysts are happy with the state of the US economy, with most predicting a ‘soft landing’ (i.e. no recession forecasted next year).

But there are also factors to consider as we look toward the future.

First, the ongoing conflicts in Ukraine and the Middle East bring some uncertainty. In addition, major disruption to global trade routes could lead to resurgent commodity prices and imperil the solidifying yet fragile economic status quo.

Second, China faces challenges to its growth, with consumer demand softening and its housing market experiencing pressures. As a key driver of global economic growth, these developments in China introduce some uncertainty, particularly if shifts in trade policy were to re-emerge. Meanwhile, China has launched a significant economic stimulus initiative focused on achieving the government’s 5% growth target. This effort aims to boost consumer demand and promote steady, sustainable growth in retail sales. 

Overall, there are promising signs for growth stabilization in the world’s second-largest economy, supported by recent stimulus measures and encouraging indicators like retail sales and industrial production.

In addition, the fiscal imbalances in many developed economies, including the US, UK, and Japan, imply that government spending cannot be expected to bolster growth as it has done in the past few years.

The presence of various potential major disruptions, coupled with a lack of obvious fiscal or monetary options for governments to mitigate them, has put 'volatility' at the forefront of everyone's mind. Simply put, market conditions may be subject to swift and unpredictable shifts.

Almost all the analysts surveyed, therefore, recommended the need for building a portfolio capable of withstanding volatility.

This includes seeking out investments in counter-cyclical sectors - such as farmland, energy, and infrastructure - which often have substantial pre-existing government commitments (especially in the context of green initiatives).

It also includes sectors driven by long-term, structural factors such as the aging population (e.g. senior housing and associated medical services).

This does not, however, mean a wholesale ‘flight to safety’, or in portfolio terms, adopting a wholly “defensive” strategy. Rather, it means prioritizing flexibility and agility and keeping a foot in both camps.

Being flexible means that one can take advantage of growth opportunities as well as stable, “safer” bets.

And, as always, diversification remains key. The broader your universe of investing possibilities, the better your chances of weathering a storm of volatility. We’ve 

 that private markets investments are a highly effective means of achieving diversification beyond public markets.

Various commentators explicitly singled out private markets as among the areas of potential growth for investors who are prepared to be proactive in seeking out individual opportunities.

While we recommend reading the available research, it is important to remember that global-level insights are informative but not typically ‘actionable’, particularly if one is looking to identify specific opportunities.

It is possible to make a bad investment in a strong sector if the company is poorly positioned to benefit from the environment. Equally, a good company can outperform its peers as the sector, country, or region overall struggles.

Being flexible means being proactive. This requires more effort than a passive approach, but in a time of high uncertainty, the return more than justifies the cost. We’d be happy to discuss what this means for your portfolio in a 1:1 meeting. Please get in touch if you would like to know more.

The Road Ahead: Insights from global investing experts

The so-called ‘jumbo’ cut was pitched at the time as a ‘recalibration’, rather than as a sign that rates would continue to descend at a similar speed.

Despite the Fed’s bold move, the minutes of the last meeting reveal that the decision was somewhat controversial.

 It was the first instance of a committee member (Michelle Bowman) dissenting from the final decision in nearly two decades.

The ‘median’ of all the members’ views implied a further 50 basis points of cuts by the end of this year, and a further 100 basis points by end-2025.

 The projections imply an expectation that GDP will continue to grow, albeit at a slow pace, that employment will dip then recover, and that inflation will continue to decline.

The determining factor in the decision to ease monetary policy after so long a period of restrictive rates was the perceived deterioration in the U.S. labor market, as indicated chiefly by the slowly rising unemployment rate.

Since then, economic data has been surprisingly positive. A ‘blowout’ jobs report for September showed hiring is still robust, and the unemployment rate has meanwhile fallen to 4.1%.

 In addition, retail sales, income, and savings growth all point in the direction of a resilient economy.

The latest CPI inflation figures also raised eyebrows. Core CPI rose for the first time in a year and a half, while Headline CPI rose faster than expected.

It’s clear therefore that inflation is not in freefall, with certain areas of the economy proving less responsive than others.

With a broader lens, however, the general path of inflation has been downwards for some time. This is true of the most important inflation indicator - Core PCE - which is expected to show a smaller increase than CPI.

In lieu of the so-called ‘soft-landing’, the phrase ‘no-landing’ has recently come into usage to describe a seamless return to normalcy, which now, counter to expectations, appears to be materializing.

Given that the Fed is in range of its 2% target for inflation, it has in one sense achieved its goal. It is now focused on how to maintain, rather than fix, the situation.

After the last meeting, there was an expectation in some quarters that the November meeting would see a further 50 basis points cut.

The bullish economic announcements, in particular the jobs report, coupled with the surprise inflation data, triggered a temporary wobble in sentiment, with some market participants doubting if the Fed would cut rates at the next meeting at all.

This passed relatively quickly, however, and as of the time of writing, views have recalibrated. The consensus is now a 25 basis points reduction in rates on November 8th,

 barring any further shocks, such as a surprise PCE reading, this is likely.

Fed Governor Raphael Bostic, when interviewed in early October

, expressed the view that individual Fed meeting decisions are ultimately of little significance compared to the larger question - where should the ‘natural rate’ (the rate at which the economy is neither expanding nor contracting) be?

In other words, where are the interest rate decisions ultimately heading?

For Bostic, this natural rate is somewhere between 3% and 3.5%, as we can see from the latest ‘dot plot’, opinions among his colleagues differ.

The U.S. election is likely to have a strong impact on the answer to this question. Both Harris and Trump have committed to substantial tax cuts and spending programs. As this will require additional government borrowing, it may be necessary to maintain relatively high interest rates to attract investors to government bonds.

Following Bostic’s advice, we think it’s wise to focus on the wood and less on the individual trees.

Permission to Land? Fed Decision November

تفضلوا بمشاهدة المقابلة الكاملة أعلاه.

توقعات عبد المحسن العمران لاتجاهات الأسواق في العام المقبل | مقابلة مع قناة العربية

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