Portfolio Performance Evaluation

The typical approach to any portfolio performance evaluation technique uses a basic comparison methodology to determine how a given portfolio has performed over time relative to an index, benchmark, or other managed portfolios. So, the best portfolio is not always the portfolio with the highest return or lowerest risk. Macroaxis grades all portfolios originated via our wealth optimization platform using risk-adjusted return which is adjusted not only for the effects of diversification but also for market risk that was diversified away. As our investor community grows we adjust the calculation of the relative score to account for individual time horizons, different tolerance for risk, sector and industry allocations, as well as a number of positions and types of financial instruments.

Macroaxis grades portfolios and equities in 2 main categories

1. Risk-Adjusted Performance Score within the context of mean-variance optimization
2. Chance of Financial Distress within the context of traditional fundamental data analysis
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1. Risk-Adjusted Performance Score

The performance score is an integer between 0 and 100 that represents market performance of a financial instrument from risk-adjusted return prospective. Generally speaking, the higher the score the better is overall performance as compared to other investors. The score is normalized against average position of the entire investing universe (the best we can interpret from the data available) and can be applied to a single equity instrument, portfolio of equities, or a group of portfolios.
To calculate the grade we take the best performance scores of all individual equity instruments and portfolios and remove everything that falls beyond 3 standard deviations from the mean. The score is then calculated as a percentage of averaged/normalized best score.
Within this methodology scores of individual equity instruments will always be inferior to the scores of portfolios of equities as portfolios typically diversify a lot of unsystematic risk away. This is why scores of 'good' stocks may seem lower then would be otherwise expected by most investors. Simply put, we do not sugar code investor positions.
Since most investors use various time horizons, have different tolerance for risk, and hold different number of securities from different industries, you have to be careful when interpreting the relative score of your position. Think of your score as a naive interpretation of where your position stays in relation to the positions of other investors.
The formula to derive Macroaxis score is based on multiple factors that are weighted according to Macroaxis proprietary algorithms. It utilizes Modern Portfolio Theory (MPT) as well as other fundamental diversification methodologies. Among other things, these algorithms take into account portfolio expected return and risk, number of assets, market volatility, industry and country specifications as well as types of securities that compose user portfolios.

2. Chance of Distress

Unlike evaluating score of a single portfolio or a group of portfolios, looking at performance score of an individual equity instrument may not be enough because performance scores do not take into account any of the fundamental data available for a given equity instrument. Macroaxis provides a single grade for evaluating probability of bankruptcy of an equity instrument that have enough relevant information on their current balance sheets. Macroaxis probability of bankruptcy score is a single number between 1 and 99 that represents a chance of a company going through financial distress in the next 2 years.
Probability of Bankruptcy compliments equity performance score by supplying investors with insight into company financials without requiring them to know too much about all of the complex accounting and financial ratios. In a nutshell, companies with Probability of Bankruptcy above 90% are generally considered to be high risk with a good chance of bankruptcy in the next 2 years. On the other hand companies with Probability of Bankruptcy of less than 15% will most likely experience some growth in the next 2 years.
Investors can think about Probability Of Bankruptcy as a normalized value of Altman Z-score. The score is used to predict probability of a firm going into bankruptcy within next 24 months and is a very simple linear, multi-factor model that measures the financial health and economic stability of a company. The score is used to predict probability of a firm going into bankruptcy within next 24 months or two fiscal years from the day stated on the available accounting statements. The model uses five fundamental business ratios that are weighted according to algorithm of Professor Edward Altman who developed it in late 1960s at New York University.
Using Chance of Distress in Valuation
The Chance of Distress score provides a unique way to complement our company valuation techniques. Similar to determining the Chance of Distress of any given company, the valuation module is also using both our quantitative analysis of the company fundamentals as well as its intrinsic market price estimation to project the real value. We also take into account other essential factors such as how the entity is managed, its c-level domain expertise and tenure, its overall leadership style as well as current the capital structure, and future earnings potential.
Chance of Distress vs Probability of Bankruptcy
Probability of Bankruptcy SHOULD NOT be confused with the real chance of a company to file for chapter 7, 11, 12 or 13 bankruptcy protection. Macroaxis defines Financial Distress as an operational condition where a company is having difficulty to meet its current financial obligations towards its creditors or to deliver on the expectations of its investors. Macroaxis derives these conditions on a daily bases from both public financial statements as well as analysis of stock prices reacting to market conditions or economic downturns including short term and long term historical volatility. Other factors taken into account include analysis of liquidity, revenues patterns, R&D expenses, and commitments, as well as public headlines and social sentiment.

How to read score-cards

Scorecards are designed to provide an instant visual feedback about investment strength of an instrument or a portfolio. The biggest advantage of our scorecards is that they are used universally across different types of equities (including cryptos) as well as applied to portfolios of equities. Ideally (in most cases) you should always pick the equities with scorecards having the left side (Performance) higher (and/or greener) then the right side (Odds of Distress). Here are some of the examples of scorecards:
Great Score Great scorecard. High expected returns, low risk and strong fundamentals. Perfect investment in the context of almost any portfolio. However, it is not recommended to have portfolios composed entirely of high quality scorecards due to the effects of possible under-diversification that can result in all positions moving together with the market. Some downside protection should be allowed.
Average socre Pretty good scorecard. Although it may hide some weak fundamental indicators, the above average expected performance can compensate for the risk taken to hold the equity. This is a perfect addition to hedge your current aggressive portfolios. Alternatively, it could also be used to create more upside for your existing conservative portfolios.
Not very good score Very high probability of financial distress under current market conditions. Slightly positive risk adjusted performance is not sufficient to justify very weak fundamentals and lack of growth.
Very weak score Very weak scorecard. Expected return is negative or very close to zero. Very high unsystematic risk, but can also have characteristics of a contrarian equity and could revert under certain economic conditions.
Diversification Score
The portolio diversification score ranges from 0 to 100. The score of 100 means that portfolio positions are perfectly diversified against each other and the market. If the diversification score is equal to 0, the portfolio has no diversification. There is only one way to get diversification score of 0 and that is when the entire portfolio has only one security that historically generates negative risk-adjusted returns. In all other cases diversification score will not be zero. If the diversification score is equal to 100, the portfolio has maximum diversification potential proven by positive long-term expected returns. It is virtually imposible for a portfolio to have diversification score of 100. The main idea behind diversification score is to grade a portfolio based on its potential to diversify away both market-driven and non-market volatility and different sources of correlations that portfolio inherits after its origination. It can also be used as a tool to ensure that investors put their money into a range of asset classes at various allocations as opposed to putting it all in one bucket. Macroaxis diversification score is an adjusted value of portfolio risk-adjusted performamce score. The value is adjusted based on the following factors:
1. Number of positions in the portfolio
2. Position weight distribution
3. Amount of cash not invested in the market
4. Portfolio Sharpe Ratio

Performance Computation Methodology

At this point to calculate Macroaxis scores of portfolios users have to run one of our analytical modules from Wealth Management Toolset. The updates to the score will be scheduled within a short period of time and will be performed weekly, unless user runs one of the provided analytics. Register to optimize your portfolios
Macroaxis is not a registered investment advisor or broker/dealer. All investments, including stocks, funds, ETFs, or cryptocurrencies, are speculative and involve substantial risk of loss. We encourage our investors to invest carefully. Much of our information is derived directly from data published by companies or submitted to governmental agencies which we believe are reliable, but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way warrant or guarantee the success of any action you take in reliance on our statements or recommendations. Also, note that past performance is not necessarily indicative of future results. All investments carry risk, and all investment decisions of an individual remain the responsibility of that individual. There is no guarantee that systems, indicators, or signals will result in profits or that they will not result in losses. All investors are advised to fully understand all risks associated with any investing they choose to do. Hypothetical or simulated performance is not indicative of future results. We make no representations or warranties that any investor will, or is likely to, achieve profits similar to those shown because hypothetical or simulated performance is not necessarily indicative of future results. For more information please visit our terms and condition page