Computerized Investing > Second Quarter 2013

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Portfolio Management Programs

I use Quicken to follow my portfolio, which contains several mutual funds such as life cycle funds. When I analyze the asset allocation, the life cycle funds are categorized as “other” which is not helpful for determining what percent of my portfolio is made up of which asset class.

Can you recommend a program that can take exported Quicken data and analyze a portfolio by asset class and can extract the breakdown of mutual funds into its report?

—ph4235 via Web inquiry

CI Editor’s Response:

There are numerous portfolio management software programs and websites available, each with varying features. Computerized Investing provides yearly articles on portfolio management software programs and websites, which should be able to help you choose something that is right for you. The most recent software program review can be found here: The most recent review of online portfolio trackers can be found here:

Though online portfolio trackers are becoming more capable, the most robust portfolio trackers are still the software programs. Additionally, online portfolio trackers require users to enter login information for accounts so that they can automatically update your portfolio. Certain users might be uncomfortable providing that type of information.

Life cycle funds are typically a combination of asset classes that can vary over time. Oftentimes, there is no set asset class that these funds fall into. Unfortunately, you may find that this is the case with all portfolio management software programs and websites. Investors with these types of funds may need to manually input asset classes.

Model Shadow Stock Portfolio Rules

For the Model Shadow Stock Portfolio management criteria, I have a couple questions/clarifications:

1. There is a sell rule regarding 12-month earnings from continuing operations being negative. Does this apply to stock buys as well? Would a stock be added if it has negative earnings from continuing operations in the last 12 months?

2. Is the “last 12 months” time period reported in the annual statement, or is it the sum of the last four quarters?

3. What is ‘earnings from continuing operations’?

—69Stingray via Web inquiry

CI Editor’s Response:

The Model Shadow Stock Portfolio is one of AAII’s most popular offerings. For buys, the Model Shadow Stock Portfolio rules stipulate that the firm’s last quarter and last 12 months’ earnings from continuing operations must be positive. The last 12 months (called trailing 12 months, or TTM) is the sum of the last four quarters.

Earnings from continuing operations can be different depending on what information you are using. By definition, earnings from continuing operations include “core” business earnings, or earnings from business segments that are expected to operate in the foreseeable future. Earnings from continuing operations are often reported in company financial statements. We use the earnings reported at the brokerage account used to house the Model Shadow Stock Portfolio.

About the Treynor Ratio

My question is regarding the use of the Treynor ratio for investment decisions. You wrote [in the First Quarter 2013 issue’s Fundamental Focus]: “Looking solely at return figures makes the choice very clear: One should invest in Wynn Resorts. However, the Treynor ratio paints a different story. . . . The Treynor ratio actually points to Pfizer generating a better risk-adjusted return.”

I have calculated the ratio for 32 stocks I own or am following, and find that stocks that I, as a value investor, would consider buying (because they appear to be undervalued) tend to have lower Treynor ratios than the median for the market as a whole. This is no doubt because, being undervalued, the stocks I follow do not have exceptional recent price performance. Conversely, stocks that have performed well in the recent past tend to be fully valued, and are therefore not necessarily good candidates for future returns, although they may have high Treynor ratios based on their historical performance.

I wonder whether the historical Treynor ratio isn’t a better after-the-fact performance measure than it is a stock-picking tool. You write that the Treynor ratio measures “how well an investment vehicle compensates the investor for a given level of risk.” At least for the historical version of the ratio, wouldn’t it be better to say, “has compensated”?

Now, the “expected return” version would be a different story. I hope you are planning to do an article showing how this version might be implemented, as I, for one, would find it very useful in comparing potential investments.

—Ronald Longhofer from Michigan via Web inquiry

CI Editor’s Response:

I agree. Any ratio calculated using historical figures is a better indicator of “after-the-fact” performance. There is no way to get around that. However, as stated in the article, the Treynor Ratio can be calculated using expected returns. Of course, using expected average returns may not be accurate since predictions are used. However, historical averages are also potentially problematic, as there is no guarantee that past performance will carry forward.

Additionally, the data is harder to obtain. For larger firms, there can be several analysts that provide 12-month target prices, which can be used as a starting point. In addition, long-term earnings growth rates can be used to come up with possible return figures.


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