The calculation of performance using the time-weighted method attempts to abstract from the capital flows, i.e. the timing and amount of the capital flows are not relevant for measuring performance. The time-weighted performance thus documents the performance of the portfolio manager, who is generally not responsible for the capital flows.
The period under review is split into sub-intervals according to the capital flows, so that the individual sub-intervals are free of capital flows. Consequently, undisputed, exact performance values for the sub-intervals can be determined using the basic formula for calculating performance.
However, this requires a portfolio valuation to be carried out at the time of each capital flow.