[update: As of November 2009, our performance calculation methodology changed.

Individual account performance is still calculated using the time weighted rate of return (daily valuation); however, it is now calculated in our wealth management platform, rather than the recordkeeping system.  

Portfolio performance now uses the Aggregate Return Method. In essence, the accounts in  the portfolio are grouped together as if they were one giant account. The market values and cash flows used to calculate performance are aggregated together and performance is calculated using the daily time weighted rate of return (just like at the account level).  This is in contrast to market-weighted performance calculations, where the monthly performance contribution of each account in the portfolio is weighted by its relative size. We switched to Aggregate Return as it does a better job of handling situations where an account in a portfolio goes to zero and then back up (which is not uncommon with TFSA accounts). ]

Our statements provide investors with performance numbers at both the individual account level and a consolidated portfolio level. In this post, I'll discuss how performance is calculated and displayed at each level. The attached image illustrates how we show consolidated performance numbers on our statements (account performance is shown in exactly the same way). Warning: this posting uses a bit of math.

Individual account performance is calculated by our recordkeeper using the time weighted rate of return (daily valuation) method. At the end of each day, performance for each account is determined by factoring out cash flows and then using the formula for daily rate of return: R = (Ending MV - Beginning MV)/Beginning MV. Performance for the month is calculated by geometrically linking the daily returns together: ((1+R1)*(1+R2)...*1+Rn))-1. We export the monthly returns for each account into our wealth management platform, which calculates 3 month and annual performance numbers by geometrically linking the monthly performance numbers.

It's worth pointing out that on our statements we only show performance data at the account level if we have 3 full months of performance data. In addition, account performance is only calculated if we have a full month of data, i.e. an account established mid-month will not have performance figures available until the end of the following month.

Portfolio performance is calculated in our wealth management platform each month, and then monthly performance is geometrically linked together. The performance of a portfolio for a given month is determined by using the weighted average of the individual accounts' rate of returns based on the market value of each account at the beginning of the month. For example, if we have two accounts with beginning market values of $70k and $30k, and monthly returns of R1 and R2 respectively, we would calculate the portfolio performance for the month as R = (70/(70+30)) * R1 + (30/(70+30)) * R2.

As with the account performance numbers, we only show consolidated portfolio performance figures if we have at least 3 full months of performance data (i.e. at least one account in the portfolio has three months of performance data).