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The sub-period calculations are the same as the monthly calculation when you are not using significant cash flow processing.
EndingMarketValue-BeginningMarketValue-NetCashFlowsBeginningMarketValue+i-1nCashflowi×DaysInPeriod-CashFlowDayi+1DaysInPeriod
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Significant cash flow processing (SCF) recognizes finalized sub-period returns. If one of the sub-period returns in the month has a final status, the existing sub-periods are not recalculated. You can check for this condition in the Diagnostics tab of the monthly report or the monthly record in the Commit Journal. If you want to recalculate the sub-period returns, disapprove all sub-period returns for that entity for that month using the Commit Journal.
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The monthly calculation geometrically links each of the sub-period returns.
1+SubPeriodReturn1×1+SubPeriodReturn2…1+SubPeriodReturnn-1
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When using the beginning or middle of day assumption, the threshold percent should be applied to the prior day's ending market value plus the sum of the first day's cash flows. This is because the first day's cash flows are weighted as 100 percent. So, the threshold dollar amount would be calculated as:
[Threshold] = ( [Prior Day's EMV] + [Sum of 1st Day's Cash Flows] ) x [Threshold Percent]
Example 1: Beginning of Day Assumption Calculation
The following table lists an example using a beginning of day assumption given this scenario.
Date | Ending MV | Cash Flow |
|---|---|---|
01/31/1999 | $1000 | |
02/22/1999 | $1200 | |
02/23/1999 | $150 | |
02/28/1999 | $1240 |
- Identify significant cash flows. Significant cash flows include such amounts as the following:
- 10 percent threshold would be $100 (1000x.10)
- $150 cash flow on 02/23 exceeds threshold - Determine sub-periods. The following table lists the sub-periods for this example.
Sub-period | Start Date |
|---|---|
1 | 01/31/1999 |
2 | 02/22/1999 |
- Calculate sub-period returns. Sub-period returns are calculated using the Modified Dietz or Internal Rate of Return calculation. Returns for this example are listed in the following table.
Sub-period | Return Calculation |
|---|---|
01/31/1999–02/22/1999 | (1200-1000-0)/(1000+(0x(0/22))) |
02/22/1999–02/28/1999 | (1240-1200-150)/(1200+(150x(6/6))) |
- Link sub-period returns. Monthly returns are calculated using the geometric linking calculation, as shown in the example in the following table.
Period | Return Calculation | Return |
|---|---|---|
01/31/1999– 02/28/1999 | ((1+.2000)x(1+.0815))–1 | .1022 or 10.22% |
Example 2: Middle of Day Assumption Calculations
The following table lists an example scenario for a middle of day assumption.
Date | Ending MV | Cash Flow |
|---|---|---|
01/31/1999 | $1000 | |
02/22/1999 | $1200 | |
02/23/1999 | $150 | |
02/28/1999 | $1240 |
- Identify significant cash flows. Significant cash flows include such amounts as the following:
- 10 percent threshold would be $100 (1000x.10)
- $150 cash flow on 02/23 exceeds threshold
- Determine sub-periods. Sub-periods for this example are shown in the following table.
Sub-period | Start Date | End Date |
|---|---|---|
1 | 01/31/1999 | 02/22/1999 |
2 | 02/22/1999 | 02/28/1999 |
- Calculate sub-period returns. Sub-period returns are calculated using the Modified Dietz or Internal Rate of Return calculation. Returns for this example are shown in the following table.
Sub-period | Return Calculation | Return |
|---|---|---|
01/31/1999– 02/22/1999 | (1200-1000-0)/(1000+(0x(0/22))) | .2000 or 20.00% |
02/22/1999– 02/28/1999 | (1240—1200—150)/(1200+(150x(6.0/6))) | -.0822 or 8.22% |
- Link sub-period returns. Monthly returns are calculated using the geometric linking calculation, as shown in the example in the following table.
Period | Return Calculation | Return |
|---|---|---|
01/31/1999– 02/28/1999 | ((1+.2000)x(1+.0822))–1 | .1014 or 10.14% |
Example 3: End of Day Assumption Calculations
The following table lists an example scenario using an end of day assumption.
Date | Ending MV | Cash Flow |
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01/31/1999 | $1000 | |
02/23/1999 | $1200 | $150 |
02/28/1999 | $1240 |
- Identify significant cash flows. Significant cash flows include such amounts as the following:
- 10 percent threshold would be $100 (1000x.10)
- $150 cash flow on 02/23 exceeds threshold
- Determine sub-periods. Sub-periods for this example are shown in the following table.
Sub-period | Start Date | End Date |
|---|---|---|
1 | 01/31/1999 | 02/23/1999 |
2 | 02/23/1999 | 02/28/1999 |
- Calculate sub-period returns. Sub-period returns are calculated using the Modified Dietz or Internal Rate of Return calculation. Returns for this example are shown in the following table.
Sub-period | Return Calculation | Return |
|---|---|---|
01/31/1999– 02/23/1999 | (1200—1000—150)/(1000+(150x(0/23))) | .0500 or 5.00% |
02/23/1999– 02/28/1999 | (1240-1200-0)/(1200+(0x(0/5))) | .0333 or 3.33% |
- Link sub-period returns. Monthly returns are calculated using the geometric linking calculation, as shown in the example in the following table.
Period | Return Calculation | Return |
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01/31/1999– 02/28/1999 | ((1+.0500)x(1+.0333))–1 | .0850 or 8.50% |
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Performance allows you to run SCF processing for entities that do not have begin or end of month positions. When linking the sub-period returns, the SCF ignores the sub-period if the begin of month position is missing and the first sub-period return is null. Or the end of month position is missing and the last sub-period return is null.
The supported scenarios based on day weighting assumptions are as follows:
- End of day assumption
If the begin of month position is not found, SCF processing creates a break at the first cash flow date. If this is the only cash flow date during the month, then you have two sub-periods. The first sub-period is from the prior month-end to the cash flow date and the second sub-period is from the cash flow date to the current month end. The first sub-period has a zero/null return because the cash flow equals the ending market value on cash flow date.
If the end of month position is not found, SCF processing creates a break at the last cash flow date. If this is the only cash flow date during the month, then you have two sub-periods. The first sub-period is from the prior month-end to the cash flow date and the second sub-period is from the cash flow date to the current month-end. The second sub-period has a zero/null return because there is a zero ending market value on both the cash flow date and the current month-end.
- Begin or middle of day assumption
If the begin of month position is not found, SCF processing creates a break at the day before the first cash flow date. If this is the only cash flow date during the month, then you have two sub-periods. The first sub-period is from the prior month-end to the day before the cash flow date and the second sub-period is from the day before the cash flow date to the current month-end. The first sub-period has a zero/null return because there is a zero ending market value on both the prior month-end and the day before the cash flow date.
If the end of month position is not found, SCF processing creates a break at the last cash flow date. If this is the only cash flow date during the month, then you have two sub-periods. The first sub-period is from the prior month-end to the day before the last cash flow date and the second sub-period is from the day before the last cash flow date to the current month-end. The second sub-period would has a zero/null return because the cash flow equals the market value on the day before cash flow date and the current month-end market value should be zero.
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The distortion that significant cash flow processing reduces becomes apparent when comparing SCF to non-SCF returns, as shown in the following table.
Assumption | SCF Return | Non-SCF Return |
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Beginning of Day | 10.22% | 8.72% |
Middle of Day | 10.14% | 8.74% |
End of Day | 8.5% | 8.77% |
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The following table lists an example, using the beginning of day assumption, of the difference in returns using the SCF and daily return calculation methods.
Date | Ending Market Value | Cash Flow | SCF Return | SCF Growth Rate | Daily Return | Daily Growth Rate |
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1/31/1999 | $1,000 | |||||
2/1/1999 | $1,001 | 0.0010 | 1.0010 | |||
2/2/1999 | $1,002 | 0.0010 | 1.0010 | |||
2/3/1999 | $1,003 | 0.0010 | 1.0010 | |||
2/4/1999 | $1,004 | 0.0010 | 1.0010 | |||
2/5/1999 | $1,005 | 0.0010 | 1.0010 | |||
2/6/1999 | $1,006 | 0.0010 | 1.0010 | |||
2/7/1999 | $1,007 | 0.0010 | 1.0010 | |||
2/8/1999 | $1,008 | 0.0010 | 1.0010 | |||
2/9/1999 | $1,009 | 0.0010 | 1.0010 | |||
2/10/1999 | $1,010 | 0.0010 | 1.0010 | |||
2/11/1999 | $1,300 | 0.2871 | 1.2871 | |||
2/12/1999 | $1,012 | -0.2215 | 0.7785 | |||
2/13/1999 | $1,013 | 0.0010 | 1.0010 | |||
2/14/1999 | $1,014 | 0.0010 | 1.0010 | |||
2/15/1999 | $1,015 | 0.0010 | 1.0010 | |||
2/16/1999 | $1,016 | 0.0010 | 1.0010 | |||
2/17/1999 | $1,017 | 0.0010 | 1.0010 | |||
2/18/1999 | $1,018 | 0.0010 | 1.0010 | |||
2/19/1999 | $1,019 | 0.0010 | 1.0010 | |||
2/20/1999 | $1,020 | 0.0010 | 1.0010 | |||
2/21/1999 | $1,021 | 0.0010 | 1.0010 | |||
2/22/1999 | $1,200 | 0.2000 | 1.2000 | 0.1753 | 1.1753 | |
2/23/1999 | $1,022 | $150 | -0.2430 | 0.7570 | ||
2/24/1999 | $1,023 | 0.0010 | 1.0010 | |||
2/25/1999 | $1,024 | 0.0010 | 1.0010 | |||
2/26/1999 | $1,025 | 0.0010 | 1.0010 | |||
2/27/1999 | $1,026 | 0.0010 | 1.0010 | |||
2/28/1999 | $1,240 | -0.0815 | 0.9185 | 0.2086 | 1.2086 | |
Monthly Linked Return | 0.1022 | 0.1022 |
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| The Significant Cash Flow monthly linked return equals the daily linked return. |
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The required valuation varies depending on the cash flow timing assumption you are using. If using a beginning of day or middle of day assumption, a valuation for the end of the day prior to the cash flow is needed.
However, if using an end of day assumption, a valuation for the end of the cash flow day is needed. These requirements are listed in the following table.
Assumption | Positions Needed |
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Beginning of Day | Cash Flow Day -1 |
Middle of Day | Cash Flow Day -1 |
End of Day | Cash Flow Day |
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If you use beginning or middle of day assumptions and the significant cash flow occurs on a Monday, Friday's valuation is used, but the sub-period ends on Sunday. The exception is when a month end falls on the weekend. If the month end falls on the weekend, the month end valuation is used instead of the Friday valuation. If the month end is on Sunday, no sub-period is created, but if the month end is on Saturday, a sub-period from Saturday to Sunday is created.
If you select the Use Business Calendar option in the report profile's Significant Cash Flow Processing dialog box and the prior day is not a business day, the sub-period ends on that date but uses positions from the next business day back.
If you use beginning or middle of day assumptions, select the Use Business Calendar option, and the significant cash flows occurs on the day after a non business day, the SCF Processing uses the entity level business calendar to find the nearest previous business day. It uses that market value in the calculation. If no entity level business calendar is available or if the source specified has no business calendar, the system uses the Eagle PACE business calendar.
Day weighting is based on the sub-period dates, not the end position date.