Portfolio Performance Evaluation
The typical approach to any portfolio performance evaluation technique uses a basic comparison methodology to determine how a given portfolio has performed over time relative to an index, benchmark, or other managed portfolios.
So, the best portfolio is not always the portfolio with the highest return or lowerest risk.
Macroaxis grades all portfolios originated via our wealth optimization platform using risk-adjusted return which is adjusted not only
for the effects of diversification but also for market risk that was diversified away.
As our investor community grows we adjust the calculation
of the relative score to account for individual time horizons, different tolerance
for risk, sector and industry allocations, as well as a number of positions and types of financial
instruments.
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To clearly understand how well your investments are doing, you'll need to consider several different measuring performance methods.
Finding and applying these methods is essential in your overall success. Hence, investors choose the performance measurement
techniques depending on the information they are looking for and the types of investments they own.
Macroaxis grades portfolios and equities in 2 main categories
1. Risk-Adjusted Performance Score within the context of mean-variance optimization 2. Chance of Financial Distress within the context of traditional fundamental data analysis Filter Equities1. Risk-Adjusted Performance Score
The performance score is an integer between 0 and 100 that represents market performance of a financial instrument from risk-adjusted return prospective. Generally speaking, the higher the score the better is overall performance as compared to other investors. The score is normalized against average position of the entire investing universe (the best we can interpret from the data available) and can be applied to a single equity instrument, portfolio of equities, or a group of portfolios. To calculate the grade we take the best performance scores of all individual equity instruments and portfolios and remove everything that falls beyond 3 standard deviations from the mean. The score is then calculated as a percentage of averaged/normalized best score.
Within this methodology scores of individual
equity instruments will always be inferior to the scores
of portfolios of equities as portfolios typically diversify a lot of
unsystematic risk away. This is why scores of 'good' stocks may seem
lower then would be otherwise expected by most investors. Simply put, we do not sugar code investor positions.
Since most investors use various time horizons, have different tolerance for risk,
and hold different number of securities from different industries, you have to be
careful when interpreting the relative score of your position. Think of your score
as a naive interpretation of where your position stays in relation to the positions
of other investors.
The formula to derive Macroaxis score is based on multiple factors that are weighted according to
Macroaxis proprietary algorithms. It utilizes Modern Portfolio Theory (MPT) as well
as other fundamental diversification methodologies. Among other things, these algorithms take
into account portfolio expected return and risk, number of assets,
market volatility, industry and country specifications as well as
types of securities that compose user portfolios.
2. Chance of Distress
Unlike evaluating score of a single portfolio or a group of portfolios, looking at performance score of an individual equity instrument may not be enough because performance scores do not take into account any of the fundamental data available for a given equity instrument. Macroaxis provides a single grade for evaluating probability of bankruptcy of an equity instrument that have enough relevant information on their current balance sheets. Macroaxis probability of bankruptcy score is a single number between 1 and 99 that represents a chance of a company going through financial distress in the next 2 years. Probability of Bankruptcy compliments equity performance score by supplying investors with insight into company financials without requiring them to know too much about all of the complex accounting and financial ratios. In a nutshell, companies with Probability of Bankruptcy above 90% are generally considered to be high risk with a good chance of bankruptcy in the next 2 years. On the other hand companies with Probability of Bankruptcy of less than 15% will most likely experience some growth in the next 2 years.
Investors can think about Probability Of Bankruptcy as a normalized value of
Altman Z-score.
The score is used to predict probability of a firm going into bankruptcy within next 24 months and
is a very simple linear, multi-factor model that measures the financial health
and economic stability of a company. The score is used to predict probability of a
firm going into bankruptcy within next 24 months or two fiscal years from
the day stated on the available accounting statements.
The model uses five fundamental business ratios that are weighted according
to algorithm of Professor Edward Altman
who developed it in late 1960s at New York University.
Using Chance of Distress in Valuation
The Chance of Distress score provides a unique way to complement our company valuation techniques. Similar to determining the Chance of Distress of any given company, the valuation module also uses our quantitative analysis of the company fundamentals and its intrinsic market price estimation to project the real value. We also consider other essential factors such as how the entity is managed, its c-level domain expertise and tenure, its overall leadership style, the current capital structure, and future earnings potential.Chance of Distress vs Probability of Bankruptcy
The probability of Bankruptcy SHOULD NOT be confused with the real chance of a company filing for bankruptcy protection for chapters 7, 11, 12, or 13. Macroaxis defines Financial Distress as an operational condition where a company is having difficulty meeting its current financial obligations towards its creditors or delivering on the expectations of its investors. Macroaxis derives these conditions daily from public financial statements and analysis of stock prices reacting to market conditions or economic downturns, including short-term and long-term historical volatility. Other factors considered include liquidity analysis, revenue patterns, R&D expenses, and commitments, as well as public headlines and social sentiment.How to read score-cards
Scorecards are designed to provide an instant visual feedback about investment strength of an instrument or a portfolio. The biggest advantage of our scorecards is that they are used universally across different types of equities (including cryptos) as well as applied to portfolios of equities. Ideally (in most cases) you should always pick the equities with scorecards having the left side (Performance) higher (and/or greener) then the right side (Odds of Distress). Here are some of the examples of scorecards:
| Great scorecard. High expected returns, low risk and strong fundamentals. Perfect investment in the context of almost any portfolio. However, it is not recommended to have portfolios composed entirely of high quality scorecards due to the effects of possible under-diversification that can result in all positions moving together with the market. Some downside protection should be allowed. | |
| Pretty good scorecard. Although it may hide some weak fundamental indicators, the above average expected performance can compensate for the risk taken to hold the equity. This is a perfect addition to hedge your current aggressive portfolios. Alternatively, it could also be used to create more upside for your existing conservative portfolios. | |
| Very high probability of financial distress under current market conditions. Slightly positive risk adjusted performance is not sufficient to justify very weak fundamentals and lack of growth. | |
| Very weak scorecard. Expected return is negative or very close to zero. Very high unsystematic risk, but can also have characteristics of a contrarian equity and could revert under certain economic conditions. |
