Alpholio™, developed by Envarix™ Systems Inc., is home of the Investment Toolkit™ – a comprehensive collection of highly-interactive analytical investment services. In particular, these services facilitate patent-based analysis and optimization of actively-managed mutual funds and arbitrary investment portfolios.

Envarix™ Systems is an independent company that has no affiliation or business relationship with any mutual fund or exchange-traded product (ETP) firms.

The name Alpholio™ is a combination of the words alpha (a financial measure of investment performance vs. a benchmark) and portfolio (a collection of financial assets).

Alpholio™ grew out of its founder’s frustration with traditional mutual fund evaluation services. As demonstrated by numerous independent studies, most of these services provide imprecise performance ratings and rankings based on vaguely-described proprietary methodologies with hardly any predictive value.

Alpholio™ provides the Investment Toolkit™ – a comprehensive collection of highly-interactive analytical investment services. Our security universe spans over 26,000 mutual funds (excluding money-market funds), 1,800 exchange-traded products (ETPs), and 5,700 common and preferred stocks traded in the U.S. public markets.

Our current services include:

  • Patent-based analysis and optimization of actively-managed mutual funds and investment portfolios
  • Comparative total (as opposed to just price) returns and volatility of a set of securities
  • Cumulative return, rolling volatility, and other statistics of arbitrary portfolios with periodic rebalancing
  • Rolling returns of a security with statistical comparison to those of another one
  • Pair-wise and multiple-security rolling correlations with associated statistics
  • Efficient frontier according to the modern portfolio theory (MPT)
  • Security lookup based on a partial ticker or name.

We are continually enhancing the above services and adding new ones.

All calculations are conducted on-demand and in real time by our scalable, cloud-based, secure web services platform with a well-defined application programming interface (API). In addition to this website, the platform also serves mobile clients, such as the Alpholio™ App for Android, as well as custom applications of commercial subscribers.

Alpholio™ provides two primary measures of the mutual fund and portfolio performance. Our patented RealAlpha™ measure assesses the value added or subtracted by active management of a fund or portfolio on a truly risk-adjusted basis. Our patented RealBeta™ measure evaluates the core exposure of a fund or portfolio to the market. In addition, Alpholio™ provides buy-sell signals derived from the smoothed cumulative RealAlpha™.

To analyze a mutual fund or an arbitrary investment portfolio, Alpholio™ replicates it with a dynamic tracking portfolio of exchange-traded products (ETPs) that exhibits a similar risk level. Alpholio™ shows which ETPs and with what percentage weights are required to build this tracking portfolio.

Alpholio™ provides an industry-unique view of mutual fund and portfolio performance that can be used in conjunction with a traditional assessment to inform investment decisions.

With this information, mutual fund investors can:

  • Rate and rank funds in various investment categories according to RealAlpha™
  • Use buy-sell signals derived from the smoothed RealAlpha™ to capitalize on periods of fund outperformance and avoid periods of underperformance
  • See what a mutual fund really holds in terms of exposure to various asset classes and market segments at any time. This enables the investor to determine if the fund correctly fits into his/her entire portfolio.
  • Determine substitute portfolios of exchange-traded products (ETPs) to
    • Emulate attractive funds that are closed to new investors, have very high initial investment minimums (e.g. institutional class shares), or have high front/rear loads
    • Skip paying excessive management fees by using low-cost ETPs to follow a fund’s strategy
    • Gain intra-day liquidity (mutual funds are only traded at market close, while ETPs are traded throughout the day)
    • Harvest tax losses while staying invested
    • Optimize holdings across multiple funds to eliminate overlaps in a portfolio
    • Hedge fund holdings if needed.

Investors with arbitrary portfolios can:

  • Determine if active management of a portfolio adds value after fees on a truly risk-adjusted basis. Sample applications:
    • Many individual investors have trading accounts at discount brokerages. Setting aside the fun factor of playing with money, do they really generate alpha?
    • A full-service brokerage offers separately-managed accounts (SMAs) to its retail clients. How can a client tell that an SMA manager generates alpha after his and broker’s fees?
    • An endowment fund or a family office manager is approached by many active managers pitching their services. Which of these managers truly add value after fees?
  • Test various investment strategies.
    Analysis is performed on-demand and in real time. No information about specific positions, trades, or dollar amounts has to be provided (periodic percentage returns suffice), so confidentiality of the tested strategy is assured.

Please note that the above statements are subject to conditions in our Terms of Service.

Through its subscription-based website, Alpholio™ serves two main types of customers: individual investors and finance professionals.

Individual investors can use the unique information provided by Alpholio™ to identify top-performing actively-managed mutual funds and to determine the performance of their own private investment accounts.

Finance professionals served by Alpholio™ are financial advisors and planners, pension fund managers, college endowment managers, mutual fund managers, family office managers, fund of funds managers, securities brokers, retirement plan sponsors, etc. Apart from analyzing the performance of mutual funds and their own custom-designed portfolios, these subscribers can also evaluate the performance of specialized managers.

In addition, Alpholio™ offers dedicated web services to financial institutions, such as full-service or discount brokerage houses, exchange-traded product companies, index fund firms, etc. that would like to provide fund and portfolio analysis services to their clients through their own websites. For example, a full-service broker may use the Alpholio™ service to select separate account (SMA) managers and demonstrate the value these managers bring to the broker’s clients in terms of generating positive RealAlpha™.

The Alpholio™ methodology is fully disclosed in our patent. In essence, we use a dynamic collection of exchange-traded products (ETPs) to form a reference portfolio that replicates, as close as possible, the analyzed fund or portfolio. Unlike with other approaches, both the membership (which ETPs) and weights (proportion of value of each ETP in overall assets) in our reference portfolio can change over time.

We do not compare the performance of a fund or portfolio to just one or more artificial market indices, which the investor cannot perfectly realize as an investment alternative. We also do not simply find one static ETP as a closest alternative to the analyzed fund or portfolio, which would not properly adjust for risk. Finally, we do not use inverse or leveraged ETPs in reference portfolios, unless absolutely required by the nature of the analyzed fund or portfolio.

First, we use an investment tenet of “One should only pay for alpha, and never for beta.” This classic maxim implies that an investor should never pay a management fee for the part of an investment’s performance that can be replicated by some multiple of “the market.”

We take this concept one step further: instead of using one static and ambiguous “market” as a reference, we construct a dynamic reference portfolio of real investment instruments, i.e. exchange-traded products (ETPs). The active manager of a fund or portfolio should then be only compensated for the portion of returns over those of the reference portfolio. Hence, we use the terms RealAlpha™ and RealBeta™.

Second, we apply another fundamental financial concept to the calculation of alpha – the time value of money. The notion here is simple: to a prospective investor considering an investment into a fund or portfolio today, any alpha generated in the near future is worth more than any alpha generated further out in time. Therefore, we discount all increments of RealAlpha™ back to the beginning of the analysis period.

To do that, we derive a discount rate from RealBeta™, which is a measure of the core volatility of the analyzed fund or portfolio. The result is an annualized discounted RealAlpha™, which can be used to rate and rank funds and portfolios on a uniform basis.

Our methodology effectively splits the traditional alpha resulting from active management into two parts: the theme picking part (also called a directional bet) and the individual security selection part.

The theme picking part generally results from the manager’s decision to focus on a particular sector or industry of the economy, a world region or country, a class of securities (stocks, bonds, commodities, etc.), and similar factors that can largely explain the performance of the analyzed fund or portfolio. The theme part may also be a byproduct of a concentration of attractive securities in a portfolio at any given moment in time. We account for the theme picking part of the analyzed fund or portfolio in the RealBeta™ measure.

The individual security selection part stems from the manager’s skill in picking individual securities within a theme. Finance theory says that an investor should not pay for beta (a degree to which a fund or portfolio performs in alignment with the overall market) but should only pay for alpha. In our approach, we contend that the investor should only pay for the security selection part of alpha, or the RealAlpha™. This is because the theme part can be easily and inexpensively replicated.

Alpholio™ uses a true risk-adjusted benchmark that is as relevant as possible to the fund or portfolio at any given time in the analysis period. The manager gets no credit (or blame) for directional bets that are represented by equivalent positions in the reference portfolio.

To see why Alpholio™ uses this approach, consider the following example:

In the first half of a given year, the manager of a large-cap equity fund determines that he should invest conservatively. Therefore, the manager builds a portfolio composed of the utilities, consumer staples, and large pharmaceutical stocks. This defensive portfolio exhibits a very low (fractional value) beta. Towards the middle of the year, the manager changes his mind and, within several weeks, replaces these positions with ones in the technology, financial, and consumer discretionary equities. Now the portfolio exhibits a high (value above 1) beta. What is the proper benchmark to truly measure the performance of this fund?

In the traditional approach, the benchmark is a single large-cap blend index, such as the S&P 500®. This index, with a beta value of very close to 1 (by definition), clearly does not truly reflect the fund’s composition or risk profile throughout the year.

In a modified approach, a fixed-weight composite of two indices, one more conservative and one more aggressive, is used as a benchmark. The problem with this approach is that neither index is applicable to the fund in that half of the year during which the fund held no stocks represented by the index. Even if more than two fixed-weight indices are used to form the benchmark, the same problem arises – the manager will get credit (or blame) for the part of his performance that is improperly measured in the other half of the year.

The natural solution then is to apply a different benchmark for each half of the year. But what if the manager made more frequent investment decisions, say quarterly, monthly, weekly, or even daily (as is typically the case)? The entire analysis period would have to be subdivided more finely, and separate benchmarks applied to each analysis sub-period. And this is exactly how Alpholio™ eliminates the assessment problem.

In the traditional approach, a performance benchmark for an actively-managed fund or portfolio has to be specified up-front and be constant throughout the entire analysis period. Typically, a single market index best representing the analyzed fund or portfolio is chosen as the benchmark. The reason for the benchmark to remain constant is that, otherwise, the manager would not get credit for all outcomes of his/her investment decisions. Unfortunately, there are multiple problems with the traditional approach.

First, managers frequently choose wrong benchmarks that do not best reflect the composition or investment charter of the fund or portfolio at all times. In many cases, the benchmarks are completely irrelevant because of the style drift of the fund or portfolio, or purposeful actions of the managers.

Second, in the traditional approach to performance assessment, the benchmark has to be selected before (ex-ante) and not after (ex-post) the manager’s performance record is collected. However, in practice, all of the rating and ranking services use the latter method because they need to fit a proper benchmark to the already known record.

Third, an investor cannot purchase an artificial index as a practical alternative to the analyzed fund or portfolio. The closest approximation of such an index is an exchange-traded product (ETP) or an index mutual fund, but not all indices are represented by such investment instruments.

Fourth, some performance assessment services choose a small collection of artificial indices, instead of just one index, to form a benchmark. In this approach, both the membership and weights of the member indices are fixed in the entire analysis period. This leads to assessment problems described in the answer to the previous question.

Finally, in the traditional approach the manager is given credit for generating alpha by making directional bets in addition to skillfully selecting securities. This implies that a manager could simply generate alpha by market timing and investment in themes represented by ETPs or index mutual funds. Unfortunately, in the process the manager would, sometimes dramatically, change the risk profile of the fund or portfolio, which would not be fully accounted for by a single, or even a composite, fixed benchmark. In addition, such an investment strategy could easily be replicated at a lower cost by the prospective investors because the manager charges a fee on top of the expenses of these investment vehicles. And that is the essence of the service Alpholio™ provides.

The regular RealAlpha™ applies to a “perfect foresight” scenario, whereas the lag RealAlpha™ is derived from a “practically realizable” scenario. For the sake of discussion, let’s assume that Alpholio™ uses a three-month time window moving within the analysis period to determine which ETPs and with what weights form the best representation of the analyzed fund or portfolio.

In the “perfect foresight” scenario, this three-month window spans two months back and one month forward from the analyzed point in time. However, if that point in time is now, this does not work – we cannot foresee the future.
Hence the “practically realizable” scenario, in which the past three months of data are used to determine the reference portfolio, and then this portfolio is “frozen” for one month forward. The problem is that in that future month the analyzed fund or portfolio evolves, while the reference portfolio does not. In other words, the reference portfolio lags the analyzed one.

The result is twofold: if the manager of the analyzed fund or portfolio makes good investment decisions in the next month, he/she will beat the “frozen” reference portfolio. Hence, the lag RealAlpha™ increment will be greater than the regular RealAlpha™ increment (in the chart, the lag cumulative RealAlpha™ curve will be above the regular one, thus giving the manager more credit).

Conversely, if the manager underperforms next month, the lag RealAlpha™ increment will be smaller. Why would this happen? Sometimes, the manager makes a wrong bet, and the investor would be better off by staying put with the “frozen” reference portfolio. This is how the investor can use the calculated Alpholio™ reference portfolio to optimize his/her investment vs. the analyzed fund or portfolio.

Alpholio™ does not purport to provide a perfect prediction of future performance of specific mutual funds or portfolios. As a matter of fact, no financial information service can honestly do that because of a multitude of factors that affect future performance of the analyzed fund or portfolio.

Consider, for example, that at any moment the membership of the management team of a fund or portfolio can change, or that management can make a large directional (sector, industry, country, asset class, etc.) bet in the portfolio within its investment charter, or that the assets of the fund or portfolio increase so much that continuing the original investment strategy is no longer possible. All these factors, and many others, make it virtually impossible to accurately and reliably forecast future performance. Not even the manager of a given fund or portfolio can accurately predict its performance, and none of them do so on record.

That said, Alpholio™ provides a unique perspective on the historical performance of the fund or portfolio, which an investor can use to determine if the manager truly added value through his/her actions in the past. Under specific circumstances, this information may provide a certain degree of assurance for a short-term performance of the fund or portfolio, provided that changes, such as the ones described above, do not take place. For example, a steady growth of cumulative RealAlpha™ over several years spanning a full economic cycle would generally bode well for the future performance of a fund or portfolio.

In addition, in most cases the smoothed cumulative RealAlpha™ curve exhibits a certain cadence (flow pattern), which enables Alpholio™ to automatically generate hypothetical buy-sell signals. The reason behind this cadence is that the composition of the analyzed fund or portfolio typically does not entirely change overnight. In other words, the manager slowly and perhaps partially divests and acquires some positions, while still retaining others, even in fund or portfolio with a high turnover ratio. This “portfolio inertia” is the cause of some degree of persistence in the part of alpha attributed to security selection.

In the end, the investor is the best judge of the information Alpholio™ provides in the form of various charts and figures to inform the investment decision.

First, the Alpholio™ methodology is fully disclosed in our patent; therefore, the user is free to replicate the results of our analyses and build the reference exchange-traded products (ETPs) portfolios if he/she so chooses. In contrast, our competitors hide the details of their proprietary approaches, e.g. by saying that they use some unspecified measures of return vs. risk, or by relying on a subjective assessment by analysts.

Second, in the analysis of mutual funds, most of our competitors compare the performance of an analyzed fund to an average performance of the fund’s peers in the same investment category. This significantly lowers the performance bar – if most funds in a given category underperform their respective benchmarks, some will still be awarded top ratings. We call this traditional approach a relative assessment of performance. In contrast, Alpholio™ uses a dynamic collection of ETPs as a custom benchmark for each analyzed fund. Because of the passive, index-based nature of most ETPs, we call this innovative approach an absolute assessment of performance.

Third, thanks to our multi-year investment in R&D, Alpholio™ can analyze not just the well-known mutual funds with a traditional monthly or quarterly frequency, but also provide a real-time assessment of performance of arbitrary investment portfolios. This on-demand analysis capability is unique in the industry.

The first major trend is the rapid growth of the exchange-traded products (ETPs) that form reference portfolios in the Alpholio™ analysis.

Recent statistics provided by the Investment Company Institute show that at the end of August 2013, ETP assets reached the level of $1.47 trillion. Over the past 12 months, these assets grew by about $250.1 billion, or 20.6%.

Over 1,400 ETPs are currently available in the U.S. The granularity of ETPs continually increases with the addition of products that cover specialized aspects of the global market. This enables Alpholio™ to provide more and more accurate analysis of funds and portfolios by building better and better reference portfolios.

While the management fees of ETPs trend down, so do trading costs – many discount brokerages now offer commission-free trading of a large selection of ETPs if held in the account for at least 30 days. This aligns well with the typical monthly frequency of Alpholio™ updates of reference portfolios for mutual funds.

Finally, Alpholio™ is fully aligned with the current trend of investment migration from actively-managed equity funds to ETPs. In particular, this trend is beginning to manifest itself in the 401(k) retirement plans.

The key to Alpholio™ analysis is the use of periodic real returns of the analyzed fund / portfolio and reference exchange-traded products (ETPs). By real, we mean returns after all management fees, and also including reinvestment of all distributions of all dividends, capital gains and return of capital, fully adjusted for share splits. An analysis that did not take these into account would be highly inaccurate. For example, most industry articles focus on price returns as opposed to total returns of investment vehicles.

In its analysis, Alpholio™ does not use reports of fund holdings that have to periodically be filed with market regulators. The reason is threefold:

  • These reports include only a point-in-time snapshot of fund holdings, taken at the end of each fiscal quarter. The snapshot does not tell investors what transpired in the fund’s portfolio throughout the entire quarter.
  • Some managers manipulate fund holdings just prior to the snapshot by “window dressing,” “marking the close” or similar techniques. Therefore, the snapshot may be heavily distorted.
  • Reports are typically published with a significant delay from the time the snapshot was taken. In the meantime, managers can substantially change the composition of a fund, especially one with a high turnover.

Alpholio™ does not take the exchange-traded products (ETPs) trading costs into account for two reasons. First, we assume that a prospective investor has adequate funds available to invest in a reference portfolio, so that the trading costs, especially in a discount brokerage account, become negligible. We also assume that the market impact of such trades in large and liquid ETPs is negligibly small. We also assume the use of limit as opposed to market orders.

Second, there is a recent trend among discount brokers to waive trading commissions for an increasing number of ETPs, both those that are originated in-house and external ones. Typically, trading commissions are waived if an investor holds the purchased ETPs for a minimum period of time, such as one month. The latter period aligns with a typical frequency of reference portfolio updates provided by Alpholio™. Please consult the current trading policies of firms such as Charles Schwab, Fidelity Investments, TD Ameritrade, or Vanguard for details.

Similarly, Alpholio™ does not take into account the front or rear loads of mutual funds, to which such charges apply. In many cases, such as in a full-service brokerage account, these funds can be purchased without the front load. The amount of rear load depends on the timing of the fund disposition, which also significantly varies among investors.

Finally, Alpholio™ does not take into account the amount an investor would have to pay to acquire or dispose of mutual funds outside of a preferred list of his/her discount brokerage account. Such fees vary among brokerages and can also significantly change over time.

Alpholio™ does not take taxes into account. Each investor’s tax situation is unique, so generalizations are misleading, such as with a simplified tax impact used in performance calculations in mutual fund prospectuses.

For example, consider the differences in tax treatment and marginal rates of an individual investor with a taxable account, an individual investor with an individual retirement account (IRA) or brokerage option in a 401(k) retirement plan, a professional manager of a fund of funds, or a college endowment manager. All of those tax situations are different. Therefore, Alpholio™ conducts its analyses assuming that all financial instruments involved are kept in a tax-deferred or tax-exempt account.

Only the ticker or name of the fund is needed; Alpholio™ already has all other data.

To analyze a portfolio, Alpholio™ requires only daily returns (expressed as percentages) or end-of-day dollar values of the portfolio (for privacy, these values can be scaled up or down through an undisclosed constant factor). This preserves confidentiality of positions in the portfolio.

Alternatively, Alpholio™ accepts portfolio positions (security tickers, number of shares, acquisition/disposition dates, and in/out cash transfers) to calculate daily values and returns of the portfolio.

For security and confidentiality reasons, we currently do not support a direct access to client accounts through online aggregation services.

Our website services both individual and professional investors. Consequently, we offer several service tiers to cater to the distinct needs of each subscriber group. In addition, Alpholio™ offers dedicated web services to commercial clients under contract.

During this promotional period, Alpholio™ services are free of charge. In return, we ask for your feedback.

During this promotional period, Alpholio™ services are free of charge. In return, we ask for your feedback.

During this promotional period, Alpholio™ services are free of charge. In return, we ask for your feedback.

Our website does not require any special software and is compatible with all modern web browsers, including Internet Explorer 11 and above, Firefox and Chrome.

Our software-as-a-service (SaaS) platform does require client software; sample code and documentation are available to commercial subscribers under contract.