Customizing Annualized Performance Return Calculations in Orion
The guide explains how Orion Connect enables financial advisors to customize annualized performance return calculations—defined as the annual average rate of return accounting for investment duration—using a specific formula, and details how firms can control these annualization settings both globally in the Firm Profile app and individually within Report Builder 3.0 to tailor client reports.
One of the main ways Orion Connect helps financial advisors provide a better client experience is the ability to generate customized reports in the format clients prefer and can understand.
Orion is continually adding new functionality and features to its reporting tools to give advisors more control over how they build reports for clients, allowing them to show the value of their services and clients' progress toward financial goals.
Therefore, Orion Connect allows advisors to choose how to annualize a performance return. This guide covers customizing annualized performance return calculations.
What is Annualization?
Annualization gives context to the growth or decline of an investment based on the amount of time it has been held. In Orion, annualization refers to calculating an annual average rate of return versus a cumulative, running performance number.
For example, if a portfolio shows a 27 percent increase over seven years, the annualized return would be about 3 percent per year, since it took seven years to achieve the 27 percent increase.
The only difference between an annualized return and an unannualized (cumulative) return is the amount of time included and whether that is factored into the equation.
How to Calculate an Annualized Return
The equation for annualizing a performance return is:
AR = ((TRF + 1)^(365.2425 / DD)) - 1
Where:
- AR = Annualized Return (in decimal format)
- TRF = Total Return Factor/Unannualized Return (in decimal format)
- DD = Difference in the number of days between the start and end date
Using the earlier example:
AR = ((0.27 + 1)^(365.2425 / 2555)) - 1
AR = 0.03478583871 or 3.48 percent
Annualization Settings in Orion
In Orion, firms can choose whether or not to annualize their generated performance returns, both across the entire database and on specific reports.
The annualization settings are controlled in two places in Orion:
- Firm Profile app
- Report Builder 3.0
Settings in Firm Profile App
The firm-level setting that drives the database default is found in the Firm Profile app. The setting consists of the option to either annualize performance for periods greater than a year or not, maintained with a simple checkbox.
A secondary portion of the calculation depends on the setting titled “Annualization Day-Count Method.” This tells the system to include all days within the date range (including weekends) as part of the day count in the calculation, or to only use days that had value.
Settings in Report Builder 3.0
The setting that establishes the performance calculation tags for custom reports is found within Report Builder 3.0.
Having the option of whether or not to annualize the returns and determine which days are counted in the calculation allows for maximum flexibility on reports. Firms may want to create a separate performance tag for each variation to allow for ease of use when applying the desired settings to the Report Builder 3.0 report.
Performance Questions
If you have questions about annualized performance return calculations or performance in general, contact the Orion SME Performance Team at performance@orionadvisor.com.