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Deeper Understanding – Portfolio Analysis

Since the turn of the year we have been busy on the Investment team - we’ve made five asset allocation changes, met over 20 investment specialists and carried out more than 25 fund reviews. 

Further to business as usual tasks we are always looking to improve our investment process.  We have an ongoing project that should allow us deeper analysis of the funds we and our clients invest in.

We review current and potential investments regularly and have a good understanding of the investment approach and style.  Over the past quarter or so we have been reaching out to our fund managers and requesting greater detail on their funds.  We now have in place non-disclosure agreements with all of our fund managers which means they are able to share the full composition of their portfolio holdings with us. This allows us to undertake more comprehensive analysis than using published data, usually just the top 10 holdings.

One of the tools we use when carrying out research is a system provided by Thomson Reuters called EIKON.  It allows us access to a huge range of global economic data from central banks and organisations such as International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD).  EIKON is also a data source for specific investments like equity and corporate bonds - meaning we are able to retrieve fundamental data, such as price earnings and price to book ratios, and analysts’ expectations and recommendations.

By integrating the fund data with EIKON it opens up a vast potential for further research and analysis with a level of detail that most firms would be unable to go into.  Not only can we analyse each fund individually we can also expand this to assess it at regional and full portfolio level. 

We are able to build a full picture of how our funds complement each other within the portfolios. Pulling in data from across all asset classes we can monitor our exposure to specific stocks or certain sectors such as banks or energy names.    

From an equity perspective we can calculate fund and portfolio valuation ratios such as price to earnings, price to cash flow, earnings per share, dividend cover etc.  We can also use analyst estimations for future earnings growth and dividend growth.  We can compare this against index and sector averages to give an indication of how the portfolio is tilted in terms of style – for instance, if the fund/portfolio is targeting value or growth.

 

Putting it into practice

We are already beginning to use the analysis to good effect in our recent Investment Team meetings.

Breaking down our Asian equity exposure to industry show that the funds are focused on growing consumer and technology themes but only have a small exposure to the banking sector.

The banking sector in China is made up of very large state owned enterprises. They also dominate the broader Chinese index and are trading on extremely low valuations, which can have the impact of distorting valuations in China.

The overall Chinese market price/earnings ratio is below 6 times earnings, a very low (or “cheap”) valuation metric relative to history and to other markets. However, the top four stocks are all state owned banks and together they make up over a third of the index. They typically trade on only four times earnings, reflecting the current perceived risk.

Our funds therefore have a higher valuation than the index, due to growth bias and lack of exposure to banks, but the underlying investments offer greater earnings and prospective future earnings potential.

This project is still a work in progress but is already helping us to ensure our portfolios are robust and it allows us to get a more detailed understanding both of the risks and the opportunities.

 

Looking ahead

The ultimate goal is to be able to look across all asset classes and work out total exposure in whatever form. For example, if we wanted to look at our total exposure to Royal Bank of Scotland we would need to look at which equity funds hold their shares, which fixed interest funds hold their bonds, which property funds have RBS as a tenant, and where funds hold any cash.

Once this project is finished, if we want to look at any factor, not just an individual stock but a sector or a style bias, we will be able to do this at the touch of a button.