Holding Period Return

Holding Period Return refers to total returns over the period for which an investment was held, usually expressed in percentage of initial investment, and is widely used for comparing returns from various investments held for different periods of time. It also captures any additional income from the investment apart from helping calculate the growth or decline in value over multiple periods.

An investor can easily compare between its different set of assets and portfolios based on the holding period return received for each of them as and when the period for which they are held gets over. Additionally, these yields also help in determining tax implications based on the period for which the asset or portfolio is held.

Holding period return, as the name suggests, is the return or yield received from the assets or portfolios held for a specific period of time. The period for which investors keep a security or asset with them is the holding period. It starts from the dafter after the asset or portfolio is purchased and ends on the day it is sold or disposed. The return received for this holding period is expressed as a percentage in most cases.

If the asset or portfolio in question is held for less than a year, it makes investor receive short-term gain or loss as return, while if the holding period is of more than a year, investors realize for long-term returns, be it a gain or loss.

The holding period return becomes an important metric for the businesses or individual investors as it gives them all an opportunity to compare between the sets of securities they own and hold for different periods.

For the calculation of HPR, there are two components that hold relevance – capital appreciation and income (dividend or interest). Capital appreciation occurs when the sales price of an asset is more than the purchase price of it. This means, the capital appreciation value is determined based on the gains that are recorded for a period.

On the other hand, the income can be in the form of interests or dividends. If the investment is made in the shares of the company, the income is in the form of dividends earned. On the contrary, if the investments is made in the debt securities, the interest payment received becomes the income.

Let us have a look at the equation below that can help to calculate the asset or bond holding period return:

An alternative version of the formula can be used for calculating return over multiple periods from an investment. It is useful for calculating returns over regular intervals, which could include annualized or quarterly returns. Here, t = number of years

Annualized HPR = * 1/t_-1

Alternatively, returns for regular time intervals can be calculated thus:

(1 + HPR) = (1+r₁) x (1+r₂) x (1+r₃) x (1+r₄)

Here, r₁, r₂, r₃, r₄ are periodic returns.

It can also be represented thus:

HPR = - 1

Here, r = return per period

n = number of periods

The calculation of HPR involves a series of steps. Let us have a look at those steps for clarity:

• The first step is to calculate the capital appraisal. For example, one buys an asset worth $10 and the value increases to $15 after during the holding period. Here, the capital appreciation value will be $15-$10 = $5.
• The next step is to calculate the income earned from investments. Now, the gain in the form of capital appreciation will be added to the dividend or income investors receive for their investments in shares or debt securities, respectively. This accounts for the total income.
• The final step is to calculate the holding period income. To get this figure, the total income derived in the second step is divided by the initial price of the asset, i.e., $10. The value derived is represented in percentage form.

Let us consider the following instances to understand the calculation of the total holding period return:

Example 1

Suppose if an individual bought a stock which paid dividends of $50 and its price reached $170 from the initial price of $140 at which it was bought a year ago.

Now, we can calculate the HPR as follows:

• HPR = / $140 = 57.14%

Now, we would try to calculate the annualized returns for the same stock over a period of 3 years. Let us suppose the stock paid dividends worth $50 each year, and returns varied with 21% growth for the first year, followed by 30% returns for the second year and -15% returns for the third year.

Now, we would calculate the annualized HPR as below:

• HPR = - 1
• = -1 = 33.70%
• The result would be HPR of 33.71 for all 3 years.

The advantage of using this method is that it would help take into account the effect of compounding over the years, which would lead to a realistic outcome.

Example 2

A report released on “Global Private Equity Report 2018” stated large private equity firms launched buyout funds with longer holding period and earned double than those assured by traditional buyout funds. These firms included major names, like CVC Capital Partners, Blackstone, and The Carlyle Group, etc.

Among these were two first-time funds that made over one billion as returns for holding them for almost 15 years.

Let us now do the same example above in Excel. This is very simple. You need to provide the three inputs of Income, end of the period value, and initial value.

You can easily calculate the Holding Period in the template provided.

Now, we can calculate the HPR as follows:

Now, we would calculate the annualized HPR as below:

HPR can be used to calculate total returns for an investment for a single or multiple periods, including various forms of returns, which might be added improperly otherwise when calculating total returns. For instance, if someone holds a stock for a certain amount of time, and it pays dividends periodically, these dividends also need to be taken into account along with changes in stock prices. It would also require keeping in mind that a rise in the value of the investment during multiple periods of return leads to a compounding effect, which might be left out in simpler calculations.

For instance, if an investment grew by 10% annually, it would be erroneous to assume that in two years, the growth on initial value would be 20%. It has to be calculated, taking into account 10% growth for the first year and then calculating 10% growth over ‘this’ amount for the 2nd year, leading to a total return of 21.1% in two years, instead of 20%.

The HPR is used as an important metric to compare the returns of assets held for different holding periods. Another key application of the holding period return formula is inaccurately calculating the effect of compounding while estimating total returns on investment for multiple periods. Apart from that, it has great utility in comparing various investments held for different time intervals in terms of their total returns over these periods.