What it means
WAM answers a simple question: on average, how long until the money in this portfolio comes back to us? A $10,000,000 bond maturing in 10 years should count for far more than a $100,000 bond maturing next week, so the average is weighted by value rather than by the number of holdings.
The figure is most often quoted for money market funds and short-term bond portfolios, where it works as a quick gauge of interest rate risk. Regulations for money market funds set a short ceiling on WAM so the funds stay stable and easy to redeem, and a creeping increase tells you the manager is taking on more rate risk.
For floating-rate securities, funds often measure the time to the next interest rate reset rather than the final maturity, because the coupon (the interest rate paid) reprices at that point. Always check which convention is being used before comparing two funds, since identical holdings can produce quite different WAM figures.
In mortgage and loan pools, a similar measure is calculated across the underlying loans, usually in months and weighted by outstanding balance. Prepayments shorten the real life of those pools, so the stated figure is best read as an upper estimate rather than a forecast.
Corporate treasurers also apply WAM to their own borrowings. If most of the debt falls due in the same year, refinancing risk is concentrated, so treasurers often lengthen the WAM or spread maturities out, even if that costs a little extra interest.
WAM is not the same as duration. WAM only looks at final repayment dates, while duration also reflects the coupon payments along the way and therefore measures price sensitivity more precisely.
Use WAM as a fast screen and duration when you need a deeper view of rate risk.
In practice
Real-world examples.
Example
A money market fund manager holds a mix of treasury bills and commercial paper. She reports a WAM of 66 days to investors each month and keeps it below the fund's limit by buying shorter paper when rates look set to rise. Clients treat the number as a quick measure of how safe their cash is.
Example
A manufacturer has three loans: $5,000,000 due in 1 year, $15,000,000 due in 5 years and $30,000,000 due in 10 years. The weighted years are 5,000,000 x 1 + 15,000,000 x 5 + 30,000,000 x 10 = 380,000,000, divided by $50,000,000 gives a WAM of 7.6 years. The CFO is comfortable because no single year carries too much refinancing.
Example
A credit analyst at a bank reviews a pool of auto loans backing a bond issue. The pool shows a WAM of 48 months, which she compares with the bond's expected life of about 30 months after prepayments. The gap tells her the bond should be repaid well before the loans themselves run off.
Formula
Calculation
WAM = sum of (value of each holding x time to maturity of that holding) / total value of all holdings
Suppose a cash fund holds $4,000,000 maturing in 30 days, $3,000,000 in 60 days, $2,000,000 in 90 days and $1,000,000 in 180 days. The total value is 4,000,000 + 3,000,000 + 2,000,000 + 1,000,000 = $10,000,000. The weighted days are (4,000,000 x 30) + (3,000,000 x 60) + (2,000,000 x 90) + (1,000,000 x 180) = 120,000,000 + 180,000,000 + 180,000,000 + 180,000,000 = 660,000,000. WAM = 660,000,000 / 10,000,000 = 66 days.Case study
Seen in the real world.
Harbourlight Cash Fund is an illustrative, fictional money market fund used here to show how WAM changes behaviour. Early in the year its WAM was 40 days, but the manager gradually bought longer paper to earn a little extra yield, and by the autumn the figure had drifted up to 62 days against an internal limit of 60 days.
The risk team flagged the breach in its monthly report. Rather than sell at a loss, the manager let $80,000,000 of holdings mature without reinvesting in longer paper and bought overnight instruments instead.
Within three weeks the WAM was back to 48 days. The illustrative lesson is that WAM drifts quietly as new purchases are made, and a standing limit with monthly monitoring catches the drift before it becomes a problem for investors.
Watch out
Common mistakes.
- Using a simple average of the maturity dates instead of weighting by value, which lets a tiny long-dated holding distort the result.
- Treating WAM as the same thing as duration, when WAM ignores the timing of coupon payments and so understates or overstates price sensitivity.
- Comparing two funds without checking whether floating-rate holdings are measured to the next reset or to final maturity.
Questions
People also ask.
Is a lower WAM always better?
Not necessarily, because a lower WAM usually means lower yield, so the right level depends on how much rate risk and liquidity need the investor has.
Does WAM change over time even if nothing is bought or sold?
Yes, because every day each holding is one day closer to maturity, so WAM shortens steadily until new purchases lengthen it again.
Where would I find a fund's WAM?
Money market funds publish it on their websites and fact sheets, usually updated daily or monthly.
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