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Portfolio Strategy

Portfolio Intelligence: Five Steps Toward Making Better Investment Decisions

What is Portfolio Intelligence? In our latest piece, we break down the five steps toward making better investment decisions.

Stan Altshuller
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What is Portfolio Intelligence (PI)?

Technology changes everything, and the investment industry is no different. Investors, especially those running institutional portfolios, are relying on massive amounts of data to make their investment decisions. Many of them now turn to a new data set, one generated by their own investment process. They do this to gain insight into their own behaviors and quantify their strengths and weaknesses. Portfolio intelligence today is much more than understanding where your risks are. It is the ability to discover your true investment skill and to maximize your performance potential.

Portfolio intelligence can be as transformational to today’s investor as business intelligence is to today’s enterprise. In fact, the two concepts are closely related. If BI uses large amounts of data to help businesses make more informed choices, PI uses large amounts of data to help investors make more informed investment decisions.

If you’re fund manager or a large institutional investor and want to stay ahead of the curve, you’re probably already investing in a sophisticated Portfolio Intelligence system that’s more robust than Excel. Whether you build in house or go with a product is a business choice, but here are five things that you should keep in mind when evaluating a solution for your company.

1. Usability

The speed, interface, navigation, visualizations, and general usability of your PI system are all essential. If you have all of the actionable data in the world but your platform is painfully slow/archaic, you would enjoy a visit to the dentist more than performing an introspective analysis. To really maximize the value you get from your PI, the system must be (reasonably) fast so you can ask a question and expand upon results, rather than losing your train of thought while waiting for information to load.

For instance, think of this progression: I am down this week – why? I see that financials are the highest P&L detractor. Which trades? How are my hedges working? What has historically happened when I was down this much in these stocks / sectors? You need answers at the speed of now. This is the big reason why we built Novus Alpha (the industry leading PI system), using the latest in distributed computing technology. We know that investors can’t wait to get the answers to burning questions.

This is what a portfolio manager using the Novus Alpha platform sees at a glance. They can see exactly the sectors (or geographies, or market caps, or analysts, etc) that are contributing or detracting from P&L. They can zoom in on specific trades and drill down into historical analysis of each position. And yes, it’s all done in real time.

Portfolio Intelligence

2. Look for More Than Just Risk

What if I told you your VaR is 42? Besides being the answer to the ultimate question of life the universe and everything, that doesn’t tell you much. Your system needs to provide context. What was your VaR last year? Which of your trades have most risk? What are your VaR bands? When have you violated them and why? How will your portfolio react under certain market regimes, or to specific market events and what are the trades most at risk? How much are your riskiest trades contributing to your P&L? These are questions only the best PI systems can answer, and not many do. Most systems focus on just one side of the equation, the risk OR return. To make informed decisions, you need both.

Portfolio Intelligence

There are many other important aspects to consider when thinking about risk: for example, exogenous factors that play a role in liquidity – who else is participating in your trade? What types of investors are they? Make sure you know what’s important to you before building or buying a system. Your system must be robust enough to provide insight into the metrics that affect your results and those that you don’t even know affect them. Having worked with hundreds of the world’s largest investors, we’ve built our system to cover a wide array of risk concepts deemed important by this group.

3. Understand Your True Skill and Areas You Can Improve

The ability to slice and dice your portfolio a myriad different ways can be crucial in learning what you’re great at and identifying weak spots (alpha drains) in your process. We recently published an article talking about five of the most damaging mistakes managers can make to relinquish their hard-earned profits. The only way to identify these types of mistakes is through a robust PI system. Here is a sample screen a portfolio manager might look at on the Novus Platform to understand the components of their returns by various sectors. How much of your return is attributable to skill vs. sector gyration?

Portfolio Intelligence

4. Compensate Fairly

Nothing is more frustrating to a fund analyst than believing they were not compensated fairly for a good year. Our hedge fund clients often talk about how important the Novus Platform is for making compensation decisions and communicating them to their analysts. Great managers do more than simply judge by the gross P&L created by each analyst. They measure the value each analyst added based on a custom risk-adjusted framework that allows them to compare apples to apples and make more educated compensation decisions. Importantly, they have the data to fall back on to defend those calls, making the process far less subjective.

For instance, in the below table a PM might note that while Steve had a lot more dollars to work with (Average Exposure), Sunil generated similar P&L and did that with fewer trades and a much higher win/loss ratio. The system allows for sophisticated benchmarking of each analyst if the PM wants to be even more scientific about compensation decisions.

Portfolio Intelligence

Your system should do this as well.

5. Communicate to Your Investors with Confidence

Reporting functionality is paramount to any PI system. The communication of your data should be supported by a responsive, flexible reporting layer sitting on top of your data. Because when you discover your skills and ways to squeeze out even more P&L from your process, you must be able to effectively communicate your findings.

Portfolio Intelligence

This is the reason we have invested heavily into a powerful reporting engine, putting all the analytics of Novus Alpha at our clients’ fingertips. With this functionality, reporting to investors, creating pitch books and communicating your value proposition becomes a simple task instead of an onerous chore. Don’t invest in a PI system that does not address this critical need.

Learn More

Better investment decisions start with better portfolio intelligence. Find out how the best investors in the world are tapping Novus to make more informed investment decisions and constantly fine tune their process in order to maximize performance potential. Visit www.novus.com to learn more.

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