Alpholio™ has recently added the Dynamic Portfolio Analysis (DPA) service to its platform. Unlike the Basic Portfolio service in which the membership of the portfolio is predetermined and only subject to periodic rebalancing over the analysis period, the DPA allows for arbitrary changes in portfolio composition. This three-part post will cover the new service in more detail.

Th DPA has two main benefits: It determines whether active management of an investment portfolio has added value on a truly risk-adjusted basis. It also shows the exposure of the portfolio to various factors that may change over time.

To start the DPA, you can supply data files in one of three formats:

  • Open Financial Exchange (OFX) or the Quicken® proprietary version thereof (QFX). Although primarily used for interchange of banking transactions, OFX/QFX files are also available for brokerage accounts.
  • Transaction comma-separated values (CSV). This simple file format is proprietary to Alpholio™. The file can easily be composed from historical account records in any text editor or spreadsheet application. To improve confidentiality, stock and cash positions may be scaled by some constant factor.
  • Return comma-separated values (CSV). Also specific to Alpholio™, this file format is even simpler than the Transaction CSV. The file contains daily historical returns, expressed either as fractions or percentages, of the analyzed portfolio. The main advantage of this format is that, by not disclosing specific trades, positions or dollar amounts, it preserves confidentiality of the investment strategy.

To learn more about the Transaction CSV and Return CSV formats, please inquire through the Contact Us page. For security, Alpholio™ only uses all uploaded files for transient analysis and does not permanently retain them.

The following screenshot shows the upload of QFX files from a sample brokerage account that mostly contained domestic and foreign large-cap stocks paying significant dividends:

Dynamic Portfolio Analysis with QFX Files

The Sweep File input is optional and used in cases where the investment account, such as at Vanguard® Brokerage Services, has a separate sub-account for a money-market fund used to automatically invest cash. The Fit Type selects the mode of the analysis (to learn more, please visit the FAQ page). Both file inputs can be reset with the Clear button.

Once the Analyze button is clicked, Alpholio™ processes both QFX files by extracting all investment and cash transactions, building portfolio values and calculating periodic returns. If there are no errors in input files, it then proceeds to analyze the portfolio just like a mutual fund. Here is the cumulative RealAlpha™ chart with related statistics for the sample portfolio:

Cumulative RealAlpha™ for Sample Stock Portfolio

The data files span 18 months but one month of history is ignored due to the required date alignment. The analysis indicates that the reference ETF portfolio cumulatively returned 4.8% more than the analyzed portfolio (see chart) and produced 3.3% of annualized discounted RealAlpha™ (see statistics). An investor managing this portfolio would generally be better off investing in the reference ETF portfolio instead, at least over this evaluation interval.

The volatility of both portfolios, measured as annualized standard deviation of returns, was comparable. The analyzed portfolio had a RealBeta™ lower than that of the broad-based market ETF.

The following chart and related statistics illustrate the constant composition of the reference ETF portfolio:

Reference Weights for Sample Stock Portfolio

As expected, the reference portfolio predominantly consisted of large-cap, dividend-paying equity ETFs: the ProShares Large Cap Core Plus (CSM), WisdomTree Dividend ex-Financials Fund (DTN), Vanguard High Dividend Yield ETF (VYM), Vanguard Mega Cap Value ETF (MGV), and iShares International Developed Property ETF (WPS).

An equivalent position in the PowerShares Senior Loan Portfolio (BKLN) indicates the sample portfolio’s exposure to high-yield bonds. The equivalent position in the iShares U.S. Healthcare ETF (IYH) implies the portfolio’s exposure to a specific economic sector. Similarly, an equivalent position in the iShares MSCI Mexico Capped ETF (EWH) represents an exposure to the economy of a specific country. Finally, an equivalent position in the PowerShares DB US Dollar Index Bullish Fund (UUP) signals a positive exposure to the USD currency. (The above table shows the weights of the final two ETFs as zero due to rounding.)

The next post in this series will show how the Dynamic Portfolio Analysis service can be used with a Transaction CSV file. The final post will demonstrate how to analyze a portfolio with a Return CSV file.

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