Alpholio™ has recently added the Dynamic Portfolio Analysis (DPA) service to its platform. The previous post in this three-part series described how the DPA can be used with OFX/QFX files. This post focuses on using the DPA with Transaction CSV files.

Let’s start with the simplest input file that contains just two transactions in a hypothetical investment portfolio: a deposit of cash into the investment account and a purchase of a single mutual fund, both on the same date. Here is how this text file looks like:

Transaction CSV for BSTSX Portfolio

The first line in the file, starting with the # character, is a comment that is ignored during processing of the CSV. The BlackRock Science & Technology Opportunities Fund (BSTSX; Service Class shares) was specifically selected for this example because it had a sufficiently long history and also did not have any distributions over the entire analysis period (which means no reinvestment of distributions was possible).

The purchase date was purposely chosen to be the last trading day of 2005. This way, the first daily return of the investment account was the first trading day in 2006, and 10.5 years of subsequent history was available.

The cash amount deposited into the account equaled the amount paid for the fund’s shares, so that the initial net cash balance was zero. The ending cash balance was also zero because the fund had no distributions. The price of the unit of cash was $1 (e.g. one share of a typical money-market fund) and the price per share of the fund was equal to the actual net asset value (NAV) of the fund on the transaction date.

The following chart depicts the cumulative RealAlpha™ and related statistics for the analyzed portfolio:

Cumulative RealAlpha™ for BSTSX Portfolio

The results are identical to those of Alpholio™’s analysis of the same fund as a standalone investment, which indicates that the Transaction CSV was processed correctly. Note that the chart starts on the last trading day of January 2006 because it was the first full month of the analysis period. It ends on the last trading day in June 2016 because this was the last full month of data available as of this writing. (While the performance of the fund itself is less important in the context of this discussion, it can be noted that over the evaluation interval the fund added a modest amount of value on a risk-adjusted basis, and so did the hypothetical portfolio that contained it.)

The second example uses a hypothetical buy-and-hold portfolio with a focus on equity investments:

Transaction CSV for Ten-Stock Portfolio

On the last trading day of 2005, $100,000 was deposited into the account to purchase approximately equal dollar amounts of ten stocks, each of the largest-cap public company in its respective economic sector per GICS (note that at that time, the currently separate real-estate sector was part of Financials).

The share price for each position was chosen at an approximate mid-point of the actual low and high prices on the transaction date. For simplicity, trading costs were assumed to be negligibly small. All dividends subsequently paid by the stocks were not reinvested but instead deposited as cash into the account, so that the cash position gradually increased. However, any corporate spinoffs were assumed to be immediately sold, with proceeds reinvested into the primary shares. All share splits were automatically accounted for during analysis but the portfolio was not rebalanced.

The following chart shows the cumulative RealAlpha™ and related statistics for the analyzed portfolio:

Cumulative RealAlpha™ for Stock Portfolio

Since its inception, the portfolio added a substantial amount of value on a risk-adjusted basis. While the analyzed portfolio’s volatility, measured as the annualized standard deviation of returns, was slightly higher than that of the reference ETF portfolio, the RealBeta™ of the analyzed portfolio was significantly lower that that of the broad-based equity ETF.

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

Reference Weights for Ten-Stock Portfolio

Consistently with the stock holdings of the analyzed portfolio, the reference portfolio comprised large-cap equity ETFs, such as the Guggenheim S&P 500® Top 50 ETF (XLG), PowerShares High Yield Equity Dividend Achievers Portfolio (PEY), PowerShares Dividend Achievers Portfolio (PFM), and iShares Morningstar Large-Cap Value ETF (JKF). The average cash portion of the analyzed portfolio was approximated by an equivalent position in the iShares 1-3 Year Treasury Bond ETF (SHY).

The final post in this series will demonstrate how the Dynamic Portfolio Analysis service can be used with Return CSV files.

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