| Portfolio Manager | Help | |
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Portfolios | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Watchlist Watchlist portfolios do not take into consideration any transactions when calculating the performance values for a portfolio. Therefore, dividends, cost averaging, etc., are not factors that are used to generate a portfolio’s performance. Since the effects of transactions are ignored Personal and Total returns are the same, which is why only one set of performance figures are provided. The calculations will consider the number of shares for each investment if the user entered values upon setting up the portfolio; otherwise, the program will omit holdings without a share value from any calculations. The program will provide performance values going back 10 years if all the holdings have inception dates prior to this period. If any holding has less than 10 years of history the portfolio will start calculating values based on the most recent inception date. So, if a user entered 5 holdings, 4 of which incepted 12 years ago and 1 that incepted 4 years ago, the graph and performance values will only return 4 years of information. Transaction |
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Portfolio Returns  This calculation assumes that no funds were added to or withdrawn from the portfolio by the investor during the measurement period. If such transactions occur, the portfolio return, as calculated, may not be as accurate a measure of the portfolio’s performance. For example, if the investor adds or subtracts funds during the measurement period, use of this equation would produce inaccurate results, because the ending value was not determined by the appreciation/depreciation of the portfolio’s holdings. Instead, any cash flows in or out of the portfolio, excluding dividends, will alter the value of the portfolio, which does not reflect the performance of the holdings. Although, a close approximation of portfolio performance can be obtained by backing out transactions within a given measurement period timing issues will still create a degree of error in the return. The following two means of return measurement help alleviate these problems and when compared, provide valuable insight into your portfolio: |
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| Total Return | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Return is a common performance methodology applied by mutual funds, because it does not consider the effect of investor cash moving in and out of a fund. Since managers do not have control of cash flows this method allows for the evaluation of their investment management skill between any two time periods without regard to the total amount invested at any time during that period. Basically, Total return is independent of the total amount invested. To generate Total returns apply the fund’s share price or NAV to the formula provided in the Portfolio Returns section. The NAV is calculated by dividing the total value of the fund’s underlying holdings by the number of shares outstanding. When an investor purchases or sells shares in the fund the number of shares in the market is re-calibrated to maintain the NAV value. So while the assets under management fluctuate, the adjustment to shares outstanding insure that the NAV values used in the Total Return formula do not reflect the movement of cash in or out of the fund. For instance, for a one year period the total return for a fund could be 25%. However, this does not consider that during this year the funds assets shrunk from $1 billion to $330 million. In the following illustration, we demonstrate how the Total return is calculated with cash flows occurring in four different periods. In addition, let’s assume other funds performed better than Fund XYZ, which resulted in net asset outflows. By reading down each column you can see how the fund performs, as well as the fall in assets under management. |
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Using the total return calculation we would give equal weighting to each time period in calculating the annualized return: |
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| Personal Returns | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Personal Returns measures the actual return earned based on the beginning portfolio value and on any net contributions made during the period. Therefore, how an investor exercises control over cash flows is crucial in assessing their investment skill. Once again we will demonstrate using the table from above, but apply the Personal Return methodology to the figures. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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On a more technical note, the true definition of the Personal return is the discount rate that equates the cost of an investment with the value of the cash generated by that investment period. So, by setting the above equation to 0 the result will provide the value for “r”, which represents the discount rate that will provide a net present value cash flow equal to zero. The final step to Personal return is: |
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Comparing Returns |
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Clearly the examples provided above show significant differences between the two methodologies. However, this is not always the case. Sometimes the two may be very similar depending on distributions and cash flows. For instance, if there are no transactions related to a particular holding in your portfolio then the two returns will be the same. The same holds true for your portfolio, which is why we only provide one set of figures for Watchlist portfolios. So, in a three month period a holding will have the same Personal and Total return if:
• No shares are purchased A gap between Personal return and Total return indicates how well investors timed their stock purchases and sales. When the Personal return is less than Total return it means that investors didn’t participate equally in the portfolio’s monthly returns. In other words, the investor purchased a holding after a big run up or held on too long before selling as the share price fell. This sometimes happens when investors chase returns and assets flow into holdings when their performance starts to peek. This effect can be exacerbated when investors aim to break even and refuse to sell a losing holding. On the other side of this, when Personal return is greater than total return it means that an investor participated in a holdings upswing or sold their position before the price hit a downswing. This can happen when investors are committed to a diversified strategy and continue to invest new monies into a holding, even when its style of investing has gone out of favor. It is important to remember that if you want to compare the performance of your portfolio to an index, mutual fund or another portfolio that you use Total return figures and not Personal returns. This is based on: • Indices calculate their performance based on total return methodology |
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Graph The check boxes next to the return names allow you to control which graphs appear. By clicking on the check mark you will de-select that particular return, removing it from the graph. To change the benchmark, use the dropdown menu in the upper left hand corner. The menu will allow you to select one index from the 19 options. However, some of the indexes do not have ten years of history, which means they do not have a start date to align with the portfolio. In this case, the menu will limit your choices based on the age of your portfolio.
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