Portfolio Styles

As required by work, I need to construct and evaluate model portfolios for financial planner groups. One of the monthly/quarterly tasks is to write commentary. My question is how can I interpret/articulate the portfolio styles better than just “mild bias to value factors”. For example, I would like to know how I can explain the underlying rationale for a portfolio to be close to style-neutral but at the same time has a significant momentum tilt. What does it imply? It will be even better if I can relate it to market condition, performance etc. Can anyone share view, resources and anything that I can use as an approach? Any input will be much appreciated.

I use Zephyr and Morningstar Direct for that. Willy

It could be that your portfolio is divided up into a dividend, interest income and capital gains component, or a risk review component. The risk review component might be the tactical manager “balancing” the risks inherent in the interest income and dividend component. So let’s say you have an income oriented portfolio 35% allocated to Canadian Bonds and 35% allocated to Canadian Dividend payers and the rest [i.e. 30%] to “Risk Review”. In the 30% risk review component, the manager might be buying healthcare companies since Canada doesn’t have too many to invest in nationally. This example may not address your exact question but you could divided up the funds by style/market cap or geography. Just a though. Willy

Hi Willy, Thanks for that, can you elaborate more on “Zephyr and Morningstar Direct”? And in regards to the portfolio… if there’s income component, that would make things a lot easier but it’s an Aust. Equity portfolio. I guess at this stage, I’m more focus on how to write meaningful commentary for these portfolios. Appreciate if you can shed some light. Takumi

I’m assuming that WillyR was referring to returns based style analysis on Zephyr in that it can help to identify if a manager tends to be large versus small, or value vs growth. I believe Zephyr defaults to using US equity indices, e.g. Russell. Assuming you have access, make sure you’re using the appropriate Australian equity indices denominated in the proper currency for your analysis. If you don’t have access to Zephyr, it can be done manually through statistical software packages (maybe even excel), but that’s a lot more complicated. Do you have access to BARRA or Northfield attribution software? That would help to break out a portfolio’s exposures beyond market cap and style. Often, the managers you’re writing about may have access to such analysis and provide them to you. Just keep in mind that it does have its limitations in describing what’s really going on. The best way is to have a conversation with the portfolio manager or someone close to the investment team to figure out what makes them tick. It’s one thing to say ‘the portfolio lagged due to active value exposure when value was a negative contributor to performance’ versus ‘the manager, consistent with his deep value philosophy, moved to an overweight in financials with new positions in Bank X and Bank Y in the belief that market concerns over balance sheet risk had become overdone.’