Fastrak includes two ways of calculating the rate of return of an investment:
- Simple
- AGR (Annualised Growth Rate)
AGR represents the 'Money-Weighted Rate of Return' which is the preferred and industry-standard measure for showing performance, this is the method that we recommend.
Simple Method
The simple method can use one of two equations:
- Gain / (Previous Value + Inflow - Outflow)
- Gain / (Previous Value + Inflow)
The Simple is calculated as 'Gain / (Previous Vale + Inflow), for the example below:
3062.25 / (30443.65+0) = 10.06%
The simple is not an accurate method of calculating the growth unless no inflow or outflow appear, or these figures appear at the beginning of the date period.
Important Note: This method of calculation doesn't take the dates of these inflows or outflows into consideration.
Eg.
If you use the calculation 'Gain/ (Previous Value + Inflow - Outflow)' with the following details:
The wrapper has a value of £100,000, outflow of £90,000 - No Inflows, A Gain of £10,000 and is checked over a 12 month period.
With the above calculations (10000/(100000+0-90000) = 100% Gain, if the outflow took place at the very beginning of the 12 month period then taking the outflow from the value leaves £10,000, if the value increases by a further £10,000 this would then be a 100% gain which would be accurate.
If however the outflow took place at the very end of the period, or the day before the report was generated then £100,000 was invested almost the entire time to create a £10,000 gain. Meaning the gain should be around 10% not 100% which simple would show.The Simple rate of return would only be accurate in a limited set of circumstances:
- Where the inflow and outflows take place at the beginning of the calculated period.
- Where no inflow or outflows take place.
AGR Method
- This method takes into consideration the dates that both inflows and outflows take place, if this is either at the beginning, end or in the middle of the period being reported on.
- This is based on XIRR a Microsoft Excel function specifically designed to calculate the Internal return rate based on cash flows that are irregular and can occur at random intervals. You can see further details related to this if you wish from Microsoft at the following link: https://support.microsoft.com/en-us/office/xirr-function-de1242ec-6477-445b-b11b-a303ad9adc9d
To calculate / check this in excel you can perform the following:
Locate the values within the 'Date and Verify Step' of the report wizard, where the AGR / Simple data shows (This is visible on most valuation report wizards).
If you select the (i) button next to the outflow you will be able to view the outflows, along with the dates these took place.
If you enter all these in excel.
Contributions / inflow should remain as a positive (Please note: The initial value is defined as a contribution within XIRR calculations) As there are no inflows, you will notice none of these in the diagram below.
Withdrawals / outflow should be a negative figure (Please note: The latest value should be defined as a withdrawal within XIRR calculations).
Within Fastrak the percentage is amended to 2 decimal places,
The AGR method is usually better when used for longer date periods, rather than shorter periods, AGR is calculated over a period of 12 months.
It could be that a report is generated for a 3month period, and if this fluctuates in price, so the value increases by 5% or 10% within this period which isnt that unusual.
Then the expectation is that this growth continues and the expected growth would then be between 20 and 40% (Based on the annual expected growth).
This could increase or decrease further based on even shorter periods, where a specific fund could have had a large unexpected spike within a few days, and the report period could be less than 3 months, meaning it could have an even larger rate.
