Calculation of Rates of Return 

Use

You use this function to calculate the rates of return (or yields) for the nodes of a portfolio hierarchy.

Prerequisites

In Customizing for Financial Supply Chain Management under Treasury and Risk Management ® Portfolio Analyzer ® Results Database ® Edit Key Figures and Evaluation Procedures you have entered the following settings:

...

       1.      You have defined key figures for the calculation of rates of return, and assigned each of them the required yield method.

The system calculates the rate of return in the evaluation currency. You can use the following key figure categories:

¡        PAYLDCC (key figure category for rates of return with a fixed evaluation period)

You define the yield period in the Interval for Periods field. The system contains the following evaluation periods: day, month, quarter, year. You can define additional evaluation periods in Customizing for Portfolio Analyzer under Results Database ® Define Yield Ranges.

¡        PAYLDSNCCC (Key figure category for period-to-date yields)

By setting the Yield Period Start indicator, you define whether the system is to start calculating the yield one year, half a year, one quarter, or one month before the key date.

       2.      You have defined a single records procedure and a final results procedure.

       3.      You have assigned the key figures for the rate of return (yield  calculation to the single records procedure and final results procedure.

You have assigned at least one portfolio hierarchy to final results procedure 2 (FRP2). You have to do this so that the system can calculate the rate-of-return key figures for each portfolio hierarchy node.

For more information, see Use of the Results Database in Portfolio Analyzer.

Features

The system contains the following methods:

·        Time-weighted rate of return (TWRR)

The time-weighted rate of return describes the returns that result from the actions of the portfolio manager. The rate of return is calculated net of the effect of the deposits into or withdrawals from the portfolio made by customers, which are factors that cannot be influenced by the portfolio manager.

The system first breaks down the analysis period into subperiods so that exogenous cash flows fall only at the end of the subperiods, and not within them. The first subperiod ends with the first exogenous cash flow; each subsequent exogenous cash flow defines a new subperiod. The last subperiod ends at the end of the analysis period.

Return R_i for subperiod i is defined as follows:

where MVE_i is the market value of the portfolio at the end of subperiod i, which is calculated as the total of the NPV PAPOSCC_i of the portfolio on the end date of subperiod i and the flows CF_i on the end date of subperiod i. MVB_i is the market value of the portfolio at the start of subperiod i, which is the NPV PAPOSCC_i-1 of the portfolio on the previous day. The time-weighted rate of return R_TWRR for the whole analysis period is calculated as follows:

 

·        Money-weighted rate of return (MWRR)

Exogenous incoming and outgoing flows of cash are not removed before the money-weighted rate of return is calculated. It is defined as rate of return R_MWRR, which used to calculate the interest rate of the portfolio, including all incoming and outgoing cash flows. This gives the exact market value of the portfolio at the end of the analysis period. The system first calculates the annualized money-weighted rate of return:

where MVB is the market value of the portfolio at the start of the period, and MVE is the market value of the portfolio at the end of the period; T is the length of the period in days, and CF_i the incoming and outgoing cash flows; d_ispecifies on which day, calculated from the start of the period, cash flow CF_i flows. The system then calculates the weighted rate of return for the analysis period:

Whereas the time-weighted rate of return can be understood as the rate of return obtained by the portfolio manager, the money-weighted rate of return is the rate of return achieved by the owner of the portfolio.

·        Modified Dietz method

The modified Dietz method is an approximation method for calculating the time-weighted rate of return; it is used to calculate the internal interest rate earned from the portfolio. The analysis period is divided into time periods i. A linear interest calculation method is used within these time periods. The rate of return of a subperiod is defined as the quotient of the net growth of the subperiod and the average capital invested in the period. Incoming and outgoing cash flows are time-weighted in a linear way, and used to calculate the average capital that is invested.

where MVB_i is the market value of the portfolio at the start of subperiod i and MVE_i is the market value at the end of subperiod i; T_i is the length of subperiod i in days, and CF_i,j is the incoming and outgoing cash flows in subperiod i; d_i,j specifies on which day, calculated from the start of subperiod i, cash flow CF_i,j flows.

Rate of return R_MDI is calculated in the modified Dietz method as follows:

The subperiods are not longer than one month.

·        Dietz method

In the Dietz method, the rate of return is not calculated for each flow of capital. The system divides the analysis period into equal subperiods. A constant rate of return is assumed for these subperiods. It is also assumed that all flows of capital take place in the middle of the subperiods. Unlike in the modified Dietz method, the flows are not weighted by the length of time over which they have an effect.

Activities

To calculate rates of return, on the SAP Easy Access screen choose Financial Supply Chain Management ® Treasury and Risk Management ® Portfolio Analyzer ® Tools ® Results Database ® Determine Single Records, and then Determine Final Results.

The system calculates the results as follows:

...

       1.      It calculates single records. It calculates only the additive key figures of the categories PAPOS and PAFLW.

       2.      It applies Final Results Procedure 1 (FRP1). In this process, it aggregates the additive key figures and converts the single records into the evaluation currency (key figure categories PAPOSC and PAFLWCC).

       3.      The system applies Final Results Procedure 2 (FRP2) in order to calculate non-additive key figures (key figure categories PAYLDCC and PAYLDSNCCC).

The final results procedure is divided into two steps so that an attribution analysis can be carried out at a later point in time.

In order to display the results of the calculation of the rates of return, on the SAP Easy Access screen, choose Financial Supply Chain Management ® Treasury and Risk Management ® Portfolio Analyzer ® Information System ® Analyzer Information System.