Saxo Bank uses the TWR (time-weighted return) method to calculate the performance of a portfolio. At BinckBank, you were used to results being calculated using the MD (Modified Dietz) method. Below we explain how both methods work, and the reason for choosing to proceed with the TWR method.
The TWR method
TWR stands for "time-weighted return". This method records the daily return of an investment, calculated up to the present moment. The total determines the return, according to the TWR method.
TWR has become the market standard. It has proven to be the most appropriate and useful method for asset management.
The Modified Dietz method
The Modified Dietz (MD) is a calculation method in which the results are not recorded on a daily basis. The method takes into account interim deposits and withdrawals. The return is calculated according to the period in which capital was available to determine the return.
The MD method was developed to allow the calculation of historical performance of a portfolio with periodic deposits and withdrawals, without becoming extremely complex. Otherwise, the complexity of the calculations required quite a lot of computing power. With the current computing capacity of computers and servers, this argument has become obsolete and with it the justification of this method. The MD method is still a good method to make an accurate estimate of the time-weighted return.
Conclusion
The TWR method is preferable if the results can be recorded on a daily basis, since it is not possible to calculate afterwards. TWR therefore also takes direct account of a deposit or withdrawal for each recording. This is possible in the Saxo Bank system, which is why the TWR method was chosen. If you want to know more about TWR, check out the article here below.
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