What other rate of returns were being used?
DVM – DAILY VALUATION METHOD
A very common methodology in use today is Daily Valuation Method (DVM) and an example of a Time-Weighted Rate of Return. When calculating a return using DVM, the effects of the investor’s transactions into or out of the account will be negated. One interpretation of this is that DVM always represents the return of the underlying fund or the performance of the Fund Manager.
What is the difference?
The main difference between IRR and DVM is how they take into account the effect of transactions. If there were very few transactions in the period, these returns would be very similar. Conversely, if there were many transactions in the period, it is also possible for these numbers to be drastically different.
A hypothetical account had a major downturn and lost 30% of its value. At the market bottom, the investor put in significantly more money. Over several years, the account steadily increased in value by 28%. The DVM return would be negative for this period since the account still hadn’t increased in value by the original 30% that was lost. However, in this situation the IRR return could actually be positive since a large investment at the market bottom with steady positive growth would be weighted more heavily than the period with the large loss but a smaller overall account value.