Get Started with Shone Wealth Management

Investor Series – Process

Share Post:

Share on facebook
Share on linkedin
Share on twitter
Share on email
Analysis of securities is of high importance when providing financial and investment advice. It generally falls into two categories that can be classified as qualitative and quantitative. When performed at a high level, the analysis effectively takes the shape of a blend of art and science. A perfect metaphor is thinking of a top-notch sports car, like a Ferrari or Lamborghini. The art component is the interior accents, race inspired bucket seats, and overall shape and color of the body. The science is the engine displacement, stopping power of the brakes, and chassis design. The important thing however is that those concepts, art and science meld to provide an experience in singularity. Although we generally deal with intangibles, the investment world operates in a similar scope when pertaining to the evaluation of securities, especially mutual funds and exchange traded funds (ETFs). Some examples of the quantitative aspects would be expense ratio (total percentage of fund assets used for administrative, management, advertising) and alpha (measure of active return on an investment), while a qualitative aspect would include the managers of a portfolio. Each security we evaluate is based on these concepts. Diving to a deeper level allows us to better understand how we should expect a security to behave in different market conditions. This long-tested method of evaluation has a fantastically simple, yet robust method of evaluation that is called the 5 P’s. These 5 P’s stand for Process, Performance, People, Parent, and Price. In this investor series we will walk through how we utilize this method to continually evaluate securities and update the underlying to make sure they are performing as expected in your portfolio. More importantly, we will also discuss why each of the 5 P’s is important.
This first section happens to be one of the most important. The Process portion of the analysis attempts to answer the questions surrounding the goals of what the fund has set out to achieve according to its prospectus but more importantly how it plans to do so. This is where the strategies of the portfolio management team get scrutinized and picked apart so that we may see if they are viable and provide value to investors. A question we may ask ourselves is if the fund is actively trying to beat its benchmark or is it passively allocating money to replicate an index? An example to help explain can be found in one of our alternative funds we use, the Goldman Sachs Absolute Return Tracker Fund (GJRTX). If we zoom out to the 10,000 feet level, this fund at its core follows an index. It attempts to replicate the hedge fund universe as represented by the HFRX Index. We recently sat down with one of their portfolio managers and she described their process as broken down into four separate sleeves that each have their own specific strategy based on what is happening in the index which contains about 3,600 separate hedging strategies. These four main strategies consist of equity long-short, global macro, event driven, and relative value. The exposures provided to each of these four are determined through running regression analysis on those original 3,600 strategies and thus allocated using a goal of diversification through liquid securities of which there is about 300 different instruments across nine different asset classes (equities, fixed income, credit, currency, volatility, commodities, MLPs, real estate, and convertibles). They do this through holding common stock, ETFs, swaps, futures, and forwards. This fund does have a fairly complex strategy, which is why we constantly monitor how the managers are implementing it. We dive into this level of detail for all the underlying funds in our models. While it’s impossible to completely eliminate risk, it’s important to know the process of how funds are trying to generate value and returns to reduce the risk of unintended consequences down the road if you- know-what hits the fan.
Griffin Sheehy, Financial Analst

Stay Connected

More Insights

Get updated

Stay Connected

Interested in becoming a part of our growing community?
Sign up for our newsletter to stay up to date on our weekly advice

Don’t Miss a Beat

Subscribe to our monthly newsletter to ensure you’re one of the first to receive our latest blog posts, company news, and more.