A COMPARISON OF VALUE- AND TIME-WEIGHTED UNIT

Unit trust returns are published and quoted regularly in various media publications.These returns, calculated as Time-Weighted Rates of Return, do not reflect theactual returns that investors perceive. The timing of capital flows into and out of thefunds affects the real returns that investors experience, and can be calculated usingValue-Weighted Rates of Return, also referred to as Dollar-Weighted Rates ofReturn.This research report compared the Dollar- and Time-Weighted Rates of Return for 60South African unit trusts from the second quarter of 1998 to the second quarter of2005. The actual returns were compared to expected returns based on randomcapital flows, and to returns based on constant and inflation linked capital flows.If investors were creating superior returns by moving capital into and out of a unittrust during periods of positive and negative returns respectively, then they will havean actual return that is higher than the published return of the fund, i.e. the Dollar-Weighted Rate of Return will exceed the Time-Weighted Rate of Return.The findings indicate that investors are destroying value by actively timing theircapital flows. The research also showed that a large percentage of the generalinvestor community would have perceived larger returns by following a constantinvestment strategy.