Money-weighted return (XIRR)
What is Money-weighted return (XIRR)?
Money-weighted return measures the investor's return while accounting for the amount and timing of contributions and withdrawals, commonly through an internal rate of return.
Systems should expose the dated cash flows and terminal value used in XIRR, classify transfers consistently, and flag multiple or missing mathematical solutions. Investor-controlled flows and manager-controlled calls should be interpreted differently. A high money-weighted return can reflect fortunate timing rather than superior underlying strategy performance.
Modified Dietz can estimate a money-weighted result but is not identical to an exact dated-cash-flow IRR.
For household reporting, the result should reconcile to actual account cash movement without treating internal transfers as new wealth. Contribution timing can dominate short-period MWR, so reports should show TWR alongside it and explain the difference in plain language.
Calculation
Money-weighted return is the discount rate that sets the present value of dated contributions, withdrawals, and ending value to zero. Contributions are negative from the investor perspective and withdrawals and ending value positive. XIRR uses exact dates. Multiple sign changes can create several mathematical solutions or no economically useful one.
What it measures
MWR weights periods according to capital invested. It reflects the investor's actual cash timing and is appropriate when the decision-maker controls calls and distributions. For evaluating a public-market manager who does not control client flows, TWR usually offers a cleaner strategy comparison. The two measures answer different questions.
Example
An investor holds little capital during a gain, contributes substantially, then experiences a loss. TWR can remain positive while MWR is negative because more money was exposed to the weak period. Conversely, adding before a rally can lift MWR. The difference is useful information about the interaction of performance and cash decisions.
Private-market use
IRR is common for private funds because managers control capital calls and distributions, although subscription lines can alter timing. Interim NAV becomes a terminal cash-flow assumption and introduces valuation uncertainty. Pair private-market IRR with TVPI, DPI, duration, public-market comparison, and complete cash-flow history.
Practical reporting
Expose cash-flow dates, amounts, signs, currency, ending value, method, and as-of date. Classify fees and transfers consistently and test solution validity. Do not average individual IRRs or compare a personal MWR directly with benchmark TWR without explanation. Modified Dietz is an approximation and should be labeled separately.
Also known as: MWR, XIRR
Sources and further reading
- Portfolio Performance Evaluation, CFA Institute
- Understanding Investment Performance, FINRA