It saddens me that Sitting confuses Annual ROR and Annualised ROR.
A fund grows at 100% in year x then drops by 50% in year y.
Annualised results show (100% + -50%)/2= 25%
If you ask a fund to determine your Total ROR this is what they do. It is highly inaccurate to the results you have with the fund. But it will show huge difference between a higher performing fund and a lesser performing fund.
Annual ROR results. ($100 X 100% = $200 X -50% =$100) so you started with $100 and finished with $100 so the annual ROR from year x to year y is zero.
If you look at the results of an individual fund over a period (Russel 90% fund from 2009 to 2013) they use this calculation. The differences between higher and lower performing funds will look smaller with this method (1 or 2 percentage points as opposed to 50 to 100 percentage points with method above, but a few percentage points makes a big difference when compounded over lots of years), however you can better determine how your investments are going. This result does not take into account fees etc.
Both types have their place. You just have to know how to use them.
The Don