DIETZ Method: Measure to calculate Portfolio Return
Anand Wadadekar
ALL ABOUT ‘DIETZ’
The DIETZ formula is named after its developer, Peter Dietz, who was associated with the Frank Russell Pension Consulting company, as well as being the author of one of the first books on the subject of Performance Measurement in 1966.
What Does Modified Dietz Method Mean?
A method of evaluating a portfolio's return based upon a time weighted analysis.
Investopedia explains Modified Dietz Method:
The Modified Dietz Method is more accurate way to measure the return on your portfolio than a simple geometric return method. This is because the Modified Dietz Method identifies and accounts for the timing of all random cash flows while a simple geometric return does not.
What Does Time-Weighted Rate of Return Mean?
- A measure of the compound rate of growth in a portfolio. Because this method eliminates the distorting effects created by inflows of new money, it is used to compare the returns of investment managers.
This is also called the "geometric mean return," as the reinvestment is captured by using the geometric total and mean, rather than the arithmetic total and mean.
Importance:
The Modified Dietz method is still the most common way of calculating periodic investment returns. The Global Investment Performance Standard (GIPS) requires a time-weighted rate of return using a valuation called as DIETZ.
The Modified Dietz method assumes that net contributions are invested at the end of the respective day they occur.
The ‘Original Dietz method’ (also known as 'Midpoint Dietz Method') is obtained by assume that all net contributions take place in the middle of the period.
Time-Weighted methodology to calculate clients' personal rate of return:
This calculation provides investors with a percentage rate of return, which indicates how their investments have performed over time, rather than how the fund has performed.
This model, also known as the Modified Dietz Formula, takes into account how long an investor has been in a fund.
Purchases and redemptions do not affect the rate of return. The key factors in this model include:
- Beginning Market Value
- Ending Market Value
- Income
- Reinvestments
- Sum of all cash flows
- Weight factor (the total number of days that the cash flow has been held in (or out of) the portfolio
The chief advantage of the ‘Modified DIETZ method’ is that it does not require portfolio market valuation for the date of each cash flow.
In June 1998, The Investment Funds Institute of Canada (IFIC) announced that its Members agreed upon a standard method of calculating an investor's personal rate of return.
After a detailed analysis and lengthy discussion, the industry agreed upon a formula using the ‘Modified Dietz Method’ as the basis of the calculation.
The Modified Dietz Method with geometric monthly linking provides unitholders with a personal rate of return in a cost- efficient and timely manner, and in a way that can be easily articulated.
The Modified Dietz Method, which complies with one of the presentation standards recommended by the Association for Investment Management and Research (AIMR) for its members, takes into account the fact that many investors buy mutual fund units on a regular periodic basis such as once or twice a month. Regular sums of money are often coming in and going out of portfolios. With the Modified Dietz Method, the investor's cash flow into or out of a fund is time-weighted into the formula. If a contribution has only been part of the portfolio for 10 days of the month, the calculation reflects this information. Because an investor's cash flows are reflected, the Modified Dietz Method approximates, with a high degree of accuracy, the investor's rate of return as opposed to the fund's rate of return. This allows investors to track how their unique investments have performed.
The Modified Dietz formula with monthly linking was chosen as the standard for the industry over the ‘Internal Rate of Return’ (IRR) and other alternatives for several reasons. The detailed calculations to arrive at IRR are generally not practicable or time efficient. The complex process needed to provide the IRR on unitholder statements could cause delays inhibiting the delivery of timely information to investors. As well, the Modified Dietz Method is reasonably easy to explain to investors.
Source: Investopedia and other Internet sites
csarengarajan
Nice and valuable inputs. could you please tell us new credit rating of banks (basel norms). I have searched in net but unable to get the same
Regards
Anand Wadadekar
According to me, Credit Rating is not mandatory under Basel Norms II.
Further, adherance to the Basel Norms II has not been made mandatory
still by Reserve Bank of India, however 2009 may see this happening
due to the WTO compulsions.
Rgds,
- Anand Wadadekar
Pune
On Mar 1, 9:46 am, csarengarajan <csarengara...@gmail.com> wrote:
> Dear Mr.Anand
>
> Nice and valuable inputs. could you please tell us new credit rating of
> banks (basel norms). I have searched in net but unable to get the same
>
> Regards
>
>
>
>
> > *ALL ABOUT ‘DIETZ’*
>
> > * *
>
> > *The DIETZ formula is named after its developer, Peter Dietz, who was
> > being the author of one of the first books on the subject of Performance
>
> > * *
>
> > *What Does Modified Dietz Method Mean?*
> > A method of evaluating a portfolio's return based upon a time weighted
> > analysis.
>
>
> > The Modified Dietz Method *is more accurate way* to measure the return on
> > Modified Dietz Method identifies and accounts for the timing of all random
> > cash flows while a simple geometric return does not.
>
> > - A measure of the compound rate of growth in a portfolio. Because this
> > method eliminates the distorting effects created by inflows of new money, it
> > is used to compare the returns of investment managers.
>
> > This is also called the "geometric mean return," as the reinvestment is
> > captured by using the geometric total and mean, rather than the arithmetic
> > total and mean.
>
>
> > *The Modified Dietz method is still the most common way of calculating
> > (GIPS) requires a time-weighted rate of return using a valuation called as
> > The Modified Dietz method assumes that net contributions are invested at
> > the end of the respective day they occur.
>
>
> > *Time-Weighted methodology to calculate clients' personal rate of return:
> > *
> > This calculation provides investors with a percentage rate of return, which
> > indicates how their investments have performed over time, rather than how
> > the fund has performed.
>
> > This model, also known as the Modified Dietz Formula, takes into account
> > how long an investor has been in a fund.
>
> > Purchases and redemptions do not affect the rate of return. The key factors
> > in this model include:
>
> > - Ending Market Value
> > - Income
> > - Reinvestments
> > - Sum of all cash flows
> > - Weight factor (the total number of days that the cash flow has been
>
> > require portfolio market valuation for the date of each cash flow. *
>
> > * *
>
> > *In June 1998, The Investment Funds Institute of **Canada** (IFIC)*announced that its Members agreed upon a standard method of calculating an
>
> > After a detailed analysis and lengthy discussion, the industry agreed upon
> > a formula using the ‘Modified Dietz Method’ as the basis of the calculation.
>
> > The Modified Dietz Method with geometric monthly linking provides
> > unitholders with a personal rate of return in a cost- efficient and timely
> > manner, and in a way that can be easily articulated.
>
> > The Modified Dietz Method, which complies with one of the presentation
> > Research (AIMR)* for its members, takes into account the fact that many
> > twice a month. Regular sums of money are often coming in and going out of
> > portfolios. With the Modified Dietz Method, the investor's cash flow into or
> > out of a fund is time-weighted into the formula. If a contribution has only
> > been part of the portfolio for 10 days of the month, the calculation
> > reflects this information. Because an investor's cash flows are reflected,
> > the Modified Dietz Method approximates, with a high degree of accuracy, the
> > investor's rate of return as opposed to the fund's rate of return. This
> > allows investors to track how their unique investments have performed.
>
> > alternatives for several reasons. The detailed calculations to arrive at IRR
> > are generally not practicable or time efficient. The complex process needed
> > to provide the IRR on unitholder statements could cause delays inhibiting
> > the delivery of timely information to investors. As well, the Modified Dietz
>
> > *Source: Investopedia and other Internet sites*
>
> > * *
> > *Best Regards,*
> > *- Anand A Wadadekar*
> > *M.Com, M.A.Economics, MBA Finance, AMFI, DIT, GCIPR*
> > *Mutual Fund Analyst*
> > *Pune, INDIA*- Hide quoted text -
>
> - Show quoted text -
csarengarajan
Kindly check the same becoz major banks are announcing corporate to go ahead of credit rating on or before 1st April 2009, if the same is not complied, the interest rate differ for those corporates. We need to discuss the same in the coming weeks.
Regards
Anand Wadadekar
Credit Rating is not mandatory for corporates.
There are two types of ratings mentioned in Basel Norms - Internally
assessed rating and externally assessed ratings.
External Credit Ratings for corporates are recommendary in nature and
not mandatory.
We also need to understand that banking institutions also have their
own assessment of the loan portfolio(corporates) even though they may
have externally assessed credit ratings.
If you come across anything contrary to my view, please do share the
same here, since it will be an informative and thought provoking
discussion.
Rgds,
- Anand Wadadekar
Pune
> of credit rating on or before 1st April 2009, if the same is not complied,
> the interest rate differ for those corporates. We need to discuss the same
> in the coming weeks.
>
> Regards
>
> On Sun, Mar 1, 2009 at 10:36 AM, Anand Wadadekar
madhwesh acharya
Regards,
Madhwesh K
Company Secretary
Bangalore
9945399584
Anand Wadadekar
Thanks for sharing your experience and Yes, you are right.
Banks do insist on Credit Rating from corporates and do charge
differential interest rates for companies having and not having credit
ratings.
However, since Mr. Rengarajan said that Credit Rating was mandatory
under Basel Norms, I clarified that it was not mandatory under the
Norms still.
However, the possiblity of making them mandatory for Indian corporates
by Reserve Bank cannot be fully ruled out.
It should also be noted that banks will not completely rely on the
credit ratings assigned by external agencies, the banks will also
assess and determine internally the credit worthiness of the
corporates asking for loans. Basel Norms do have a mention of such
internal assessment of credit worthiness.
Rgds,
- Anand Wadadekar.
Economist
> Dear Mr. Rengarajan/ Mr. Anand,
>
> I would like to share my experience.
>
> One of our group companies had approached a schduled commercial bank for
> term loan and such bank had asked them to go for credit rating. though not
> mandatory, the bank had different interst rate slab for different ratings.
> such company had to go for credit rating in order to reduce the interest
> rate as low as possible.
>
csarengarajan
Anand Wadadekar
I am sure I was quite crystal clear regarding the obtaining of credit
rating.
Rgds,
- Anand Wadadekar
Economist
On Mar 4, 10:22 pm, csarengarajan <csarengara...@gmail.com> wrote:
> One of our group company got sanction from State Bank of India during
> December 2008 and one of the special conditions is that the company should
> obtain credit rating from the credit rating agencies. When we interact with
> the bankers and they said by next financial year all corporates advised to
> obtain credit rating compulsorily. The Banking institutions wants to adopt
> such rating in order implement international practice. The rating allows
> them to analyze the risk involved in the companies existing business and
> also to reduce Non perfoming Assets.
>
>
> read more »- Hide quoted text -