Analytics, long used in the construction of portfolios, are emerging as a powerful communications tool for advisers. They can aid discussions about portfolio performance and also help advisers and clients make decisions about future investments.
The idea of using data to illustrate performance is not new and advisers in the past have typically prepared charts and graphs to help clients understand the trajectory of their overall portfolios. Sophisticated analytics such as those built into MA Operator, however, are changing the game and enabling clients to visualise and understand their portfolio at a much deeper level.
For instance, advisers can now sit with clients over a laptop or tablet and review their portfolio and dive into all of the underlying investments. They can also manipulate the analytics in real-time to determine the impacts of any changes to the portfolio.
Analysis of any portfolio begins at the security level. Our analytical tools start with the calculation of daily capital, income and total return based on price movement and income payments of the security. Having a daily return and pricing series for every security held in our system enables us to analyse securities of a specific type (eg Australian Share ETFs), groups of securities that make up an SMA, or product and a multi-asset models.
The table below illustrates how a group of securities can be compared. The securities listed are well known ETFs that replicate the ASX200. Being able to easily compare the characteristics and performance of a list of securities helps in the process of building a portfolio and explaining to a client why one or two are preferable to others.
The last three months’ performance of Security D and E disguises an uncompetitive longer performance track record. Moreover, Security E has underperformed, with a higher annual volatility than the other securities as well as the index it is replicating.
Similarly to securities, model analysis commences with the calculation of a daily capital, income, and a total return price series which enables performance and risk analysis. The charts below illustrate the performance and risk characteristics of a balanced model that has been running for a little over three years.
The risk profile used here has the risk and performance characteristics that you would hope to demonstrate to a client:
- Performance generated from a combination of capital growth and income;
- Lower volatility than a portfolio of Australian Shares (5.48% compared to 12.64%);
- Beta compared to XJO significantly lower than 1.00;
- A solid Sharpe and Sortino ratio.
These types of analytics can help advisers increase the transparency and value they provide whilst also helping the client to feel more in control of their investments. All of these benefits contribute towards building trust in the advice process, which is of critical importance in today’s environment.