Aggregating Portfolios for Performance Measurement and Analysis

For investors with more than one portfolio, the risk return performance of the aggregated portfolio is important for measuring the owner’s welfare. This is easily accomplished in RoboPPA™ with careful consideration of analysis period dates, transfers, and taxes.

The Problem

An investor has one or more tax sheltered portfolios plus taxable portfolios, under different management. The dates of inception and perhaps termination of the portfolios are unlikely to be identical and an analysis period is required. The period is unlikely to contain all the portfolios in every month, all of which is accommodatable in RoboPPA™.

When aggregating portfolios, it is recommended that the analysis is conducted on a pre-personal tax basis, for comparability with other portfolios. It is also recommended that the analysis is conducted after withholding taxes on foreign assets. An analysis may start from the earliest portfolio’s inception date and sequentially add other portfolios on their inception dates, until the last month’s closing date. The starting date may contain more than one portfolio and the ending date must contain at least one portfolio.

Attention to the details of adding or subtracting portfolios in an aggregate portfolio is required, prior to importing to RoboPPA™, for correct analysis.

The Details

For the starting month of analysis, the sum of the available portfolios’ month-end market values is entered. In subsequent months, the market values of portfolios already in the aggregate and new portfolios in the month are simply added together to give the market value of existing aggregated portfolios. In RoboPPA™, market values are entered at month ends only.

At any month end when a new portfolio enters the aggregate, a portfolio contribution equal to that portfolio’s market value is entered on that date. Its market value need not be manually added to the existing aggregate portfolios’ total value; the software takes care of that internally. Similarly, a portfolio that is withdrawn from the aggregate requires a withdrawal equal to that portfolio’s market value on the withdrawal date. Regardless of the actual withdrawal date, the actual value at withdrawal is entered but the entered date is the month end date.

Other contributions or withdrawals that occur in any month, for each portfolio in the aggregate, are simply entered on the exact date each occurs. It is critical to remember that a withdrawal from one of the aggregated portfolios, that is contributed to another aggregated portfolio, is NOT a transfer and need not be entered because the withdrawal is exactly offset by the contribution to the aggregate portfolio.

Management fees are assumed paid from the aggregated portfolio’s cash accounts and are entered on their specific dates in each month. In cases where the fees are paid from an account, external to the aggregated portfolio, fees are entered as usual but a contribution equal to the fees must be entered on the date of an external fee payment.

An Example

A portfolio owner received a manager’s report for two portfolios. The initial report claimed an aggregate return of approximately 15%. After independent analysis determined an actual return of approximately -1%, the owner notified the portfolio manager of the large return and suspected error, the manager sent a revised report that reported an approximate +1% return, without explanation. The following example is based on the actual events, but the values and date entries have been changed to provide an explanation of the error.

On December 31, 2018, an investor has a two-portfolio aggregate with market value $538,017. In the following month on January 31, 2019, $25,000 was transferred from portfolio #2 to portfolio #1. An error was made in the monthly report by entering a $25,000 withdrawal from portfolio #2, but no contribution was entered for portfolio #1. The market value was correctly stated and did not reflect the error. Several contributions and withdrawals were made in 2019, in addition to the $25,000 error.

Unaware of the transfer problem, the portfolio’s owner is interested in the aggregated portfolio’s performance from December 31, 2018 to December 31, 2019.

The calculated IRR, treating the $25,000 as a portfolio withdrawal, without an offsetting contribution, is 25.88%/year. RoboPPA™ correctly calculates the IRR over the analysis period as 20.06%/year, by not treating the $25,000 as a portfolio withdrawal.

A significant advantage of RoboPPA™ is that the required inputs for its performance analysis can be saved in its template and updated monthly. This can be done entirely on the user’s computer and never stored on the software’s servers. The software maintains the benchmark databases thereby reducing the user’s work. Finally, the software allows analyses over any selected period contained in the data template’s horizon, providing it exceeds eight months.

Caveats

The analysis and the results in this document are not to be interpreted as representative of real markets and asset classes and are not warranted to be correct or complete. The example is based upon our opinion and interpretation of the data and results, which may be incomplete or incorrect. RoboPPA™ or the data suppliers are not responsible for any damages or losses arising from use of this blog. Details on the performance calculations are available on www.RoboPPA.com.