Example of Portfolio Analysis


The following is an analysis done on the top 24 holdings of an actual fund. This is a value fund based in the US that is 4-star rated by Morningstar. While these 24 stocks are not representative of the entire portfolio, we will carry out an analysis on them to illustrate what would happen if we were to do the same analysis on your portfolio.

From the chart below you could see that this value fund currently own stocks that have a historical average PE of 16.8x, which is only at a slight discount to the market. These stocks are also trading at their own average PE (right on the red line) so they are neither significantly cheaper than the market, nor compared to their own historical average valuation. The earnings growth for these stocks are still favorable as indicated by the rising red line. However, as the stocks are now trading close to market PE, perhaps some rebalancing could be done to find stocks that are more significantly cheaper than the market, to be in line with its investment objectives.


The second chart below shows the relative performance of these stocks vs. the market and explains why they outperform or underperform. This will give us a clue as to whether they will outperform or underperform in future. We see that these stocks used to trade at slightly higher than market PE but have been derated due to poor earnings growth (declining red line). They are now trading at PE that is slightly below the market. Will these stocks outperform? They will only do so for these two reasons. 1. Their relative PE to the market goes higher. 2. Their earnings growth is higher than the market. 

From the chart, it seems unlikely that both will happen. These stocks’ relative PE to the market have declined from 1999 to 2010 but they did not go back to their previous values. They continued to trade at slight discount to the market as seen from the blue line hovering flat above the green line from 2010 to now. They are also unlikely to outperform via superior earnings growth because the earnings growth is flat vs. the market (as seen from the flat purple, red and green lines).


Now we will do an analysis on the top 24 holdings of a growth fund. This is an actual growth fund based in the US that is 5-star rated by Morningstar.

From the above chart you could see that this growth fund currently own stocks that have a historical average PE of 20.4x, which is slightly higher than the market. These stocks are also now trading way above their historical average PE and the current average PE is close to 30x. While the expected earnings growth of the companies are high, the steep price appreciation looks like the stocks may have run ahead of their fundamentals.


From the second chart above, we see that these stocks have done well vs. the market as indicated by the upward sloping blue line. This good performance came from both higher earnings growth relative to the market (as indicated by rising red line) as well as PE of the stocks rising faster than the market (as indicated by the blue line moving from below the red line to above the red line in the last 10 years). These stocks used to trade at around 20% PE premium to the market but now they are trading at around 50%. While earnings growth of these companies are still expected to be higher than the market (as indicated by the rising red line), it also looks like they have run ahead of their fundamentals.

The above analysis is done on an aggregate basis for the portfolio. For every stock in your portfolio, we calculate its historical average as well as current valuation based on five indicators (Price to Earnings, Price to Sales, Price to Book, Price to Cash Flow and Dividend Yield). Besides valuation, we also calculate the consensus earnings and dividend growth, financial condition score (based on Z-Scores), quality of earnings score (based on Beneish M-Scores) and operating excellence scores (based on F-Scores).

The above analysis need not be restricted to your own portfolios. It could also be used as part of a third-party manager selection process. For example, if you are thinking of hiring a third-party value manager, you could ask them for their top 25 holdings for a portfolio that matches your mandate. Then perform the above analysis on their model portfolio to see if they are truly value managers that choose stocks significantly cheaper than the market. You could also see whether the manager is choosing cheap stocks with poor fundamentals for the portfolio. This will give you an insight as to whether the portfolio managed by them will perform and meet its investment objectives. It is a forward-looking analysis, which differs from what most manager selection consultants are doing. They focus on past performance and whether past investment actions are consistent with the manager’s stated investment process.


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