How is Time Weighted Average Capital (TWAC) calculated?

The calculation of the rate of return for a year is easy if there are no additions to or subtractions from capital during the course of the year, other than from investment activity. However:

• In some years, there will be a few additions if more capital becomes available for investment.
• There will also be some capital withdrawn e.g. for taxation, SMSF administration costs and pensions taken from the SMSF.

This can make things very complicated. There are several ways to work out the return, but as a practical person, I have opted for a fairly simple procedure.

In working out the return, I calculate the return not on the starting capital, but on the time weighted average capital (TWAC). The calculation of TWAC is very simple. I work out how much capital I had to invest for how many days and weight it by the fraction of the year for which it was available. Here is a simple example to illustrate the method, using an Australian financial year:

Facts

On 1 July, I start with \$1,000,000.

On 5 September, I withdraw \$50,000.

On 17 March, I add \$160,000.

TWAC Calculation

 Period Days Capital Available Calculation Time Weighted Capital 1 July – 4 September 66 1,000,000 1,000,000 ×   66 ÷ 365 180,822 5 September – 16 March 193 950,000 950,000 × 193 ÷ 365 502,329 17 March – 30 June 106 1,110.000 1,110,000 × 106 ÷ 365 322,356 TWAC 365 1,005,507

In a financial year that includes February 29 (occurs in a leap year), use 366, not 365 days.

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