Classifications

• • G—PHYSICS
  • G06—COMPUTING OR CALCULATING; COUNTING
  • G06Q—INFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
  • G06Q40/00—Finance; Insurance; Tax strategies; Processing of corporate or income taxes
  • G06Q40/02—Banking, e.g. interest calculation or account maintenance

Definitions

• the present invention relates generally to managing financial portfolios, and more particularly, the present invention relates to the enhancement of index tracker quant equity portfolios with a comprehensive method relying on a congruent blend of corporate governance driven shareholder value inputs and other financial performance criteria.
• the present invention attempts to fill that apparent gap. It stems from the research and development endeavors of the inventor to design a comprehensive model for enhancing index tracker quant equity portfolios.
• the inventor designed the first quant corporate governance and shareholder value driven multinational equity fund ever experimented in the world, i.e. ABF Europe Valeur Actionnariale, the performance of which is outlined in FIG. 3. This experiment provided valuable information for significantly improving the method of the present invention.
• Roots of the Invention [0014] The roots of the invention actually stem from the decade long, self started "pro bono publico” endeavors of its inventor, to assemble major pension funds, and other institutional investors, in the framework of the ICGN.
• the initial idea to set up the ICGN is reported to have been sketched since 1989 by the inventor, at various meetings held at the Association of British Insurers (ABI) in London, the California Public Employees Retirement System (CaIPERS) in Sacramento, the Council of Institutional Investors (CII) in Washington, DC, the College Retirement Equities Fund (TIAA- CREF) in New York, the National Association of Pension Funds (NAPF) in London, etc.
• the inventor contributed to organize several ICGN conferences, among others with the ABI and the Corporation of London, with ParisBourse, with the Manual Boerse, and with the New York Stock Exchange. The inventor also co-chaired the Working Group in charge of drafting the "Global Corporate Governance Principles" of the ICGN and was elected as Co-Chairman of the Board of Governors of the ICGN. In 2000, the assets held by the members of the ICGN were estimated to approach US$10 trillion. http://www.ICGN.org
• the '238 patent describes an apparatus and method for -automatically modifying a financial portfolio by calculating weights of index stocks and setting target proportion weights for each stock. Once the target proportion weights have been calculated, the portfolio is altered to reflect the target proportions.
• the '778 patent describes a method of selecting corporate stocks for investment.
• the 778 patent uses different selection models, for selecting stocks for investment 1-1 through 2-9.
• This patent provides for selecting various stocks through the use of specific criteria including market capitalization, price-to-sales ratios and annual earnings.
• the '018 patent describes a method for selecting the value of portfolio weight for each of a number of assets in an optimal portfolio by calculating a mean-variance frontier and indexing a set of portfolios located on the mean variance frontier. This process thereby creates indexed portfolios, which then allows resampling a plurality of simulations of input data consistent with the defined expected return and standard of deviation of return of specified assets.
• the method further provides for computing simulated mean variance efficient portfolios that establish a statistical mean for each mean variant efficient portfolio, thereby creating a multiplicity of statistical means that create a resampled efficient frontier.
• the method concludes by selecting weights of assets based upon specified risk objectives and investing funds accordingly.
• the '696 patent describes a portfolio selector for selecting an investment portfolio from a library of assets based on investment risk and risk-adjusted return.
• the selector chooses a tentative portfolio from the library and determines a risk-adjusted return for the portfolio.
• the risk-adjusted return is computed by subtracting the average of multiple segment shortfalls from the average of multiple segment performances, over the same segments, based on analysis of market value data for the assets in the portfolio and for a baseline asset.
• the asset selection and computation is repeated until the risk-adjusted return of the portfolio satisfies criteria derived from performance data specific to an investor.
• a data storage medium encoded with instruction for performing the method is also provided.
• the '442 patent describes a data processing system and method for selecting securities and constructing an investment portfolio is based on a set of artificial neural networks which are designed to model and track the performance of each security in a given capital market and output a parameter which is related to the expected risk adjusted return for the security.
• Each artificial neural network is trained using a number of fundamental and price and volume history input parameters about the security and the underlying index.
• the system combines the expected return/appreciation potential data for each security via an optimization process to construct an investment portfolio which satisfies predetermined aggregate statistics.
• the data processing system receives input from the capital market and periodically evaluates the performance of the investment portfolio, rebalancing it whenever necessary to correct performance degradations.
• the '899 patent describes combining data gathering and processing methodology with computer apparatus to produce a system whereby a list of stocks and a cash position is generated and purchased for investment and operating accounts.
• the system integrates three areas of data: investment performance for investment managers (the investment manager database); federal Securities Exchange Commission ("SEC") reports filed quarterly by investment managers (the government report database); and financial characteristics for a large number of stocks (the stock database).
• SEC Securities Exchange Commission
• Various screens and criteria are applied to the three data areas.
• the investment managers in the investment manager database are screened to find investment managers with top performances who meet a series of other criteria.
• the government reports are screened based upon the largest stock holdings for the investment managers chosen in the first step.
• the stock database financial characteristics are applied against the stocks from the government reports.
• the present invention solves significant problems in the art by providing a method of enhancing equity portfolios utilizing corporate governance driven shareholder value inputs.
• what is provided is a method for enhancing the returns of an equity portfolio, comprising quantifying investor opinions and opinions of other experts in the field of finance on corporate governance; scoring stocks using main value driver criteria; and enhancing the equity portfolio based upon the stock scoring results.
• a method for enhancing the returns of an equity portfolio comprising quantifying the potential impact on equity markets of the views expressed by leading institutional investors on major corporate governance and shareholder value issues; monitoring continuously the consensual opinion of leading institutional investors, and other opinion leading experts, through periodic surveys; scoring stocks using main value driver criteria; and enhancing the equity portfolio based upon the stock scoring results.
• the invention provided is a method for enhancing the returns of an equity portfolio relative to a benchmark stock index, comprising quantifying the potential impact on equity markets of the views expressed by leading institutional investors on major corporate governance and shareholder value issues; monitoring continuously the consensual opinion of leading institutional investors, and other opinion leading experts, through periodic surveys; scoring stocks using main value driver criteria; and enhancing the equity portfolio based upon the stock scoring results.
• the invention provided is a method for enhancing the returns of an equity portfolio, comprising scoring stocks using main value driver criteria including corporate governance criteria; and enhancing the equity portfolio based upon the stock scoring results.
• the invention provided is a computer-implemented system for ranking at least one stock, comprising at least one stock chosen to be included in an enhanced equity portfolio; criteria analyzed for each stock, due to the criteria relevance to stock performance; a score objectively assigned to each criterion; a predetermined weight assigned to each criterion; a subtotal number for each criterion, whereby the subtotal number is the product of the objectively assigned score and the predetermined weight; a total number, whereby the total number is the sum of the subtotal numbers for the criteria; a database for storage of the criteria, the score, the predetermined weight, the subtotal number, and the stock total number; a computer, whereby the computer is used for retrieving information from the database and scoring the stocks.
• the invention provided is a computer-implemented method for ranking at least one stock, comprising selecting at least one stock, whereby the stock will be included in an enhanced equity portfolio; choosing criteria to be attributed to each stock, due to the relevance of the criteria to stock performance; analyzing criteria for each stock; assigning an objective score to each criterion; assigning a predetermined weight to each criterion; calculating a subtotal score for the stock, whereby the subtotal score is the product of the objective score and the predetermined weight; calculating a total score of the stock, whereby the total score is the sum of the subtotal scores; ranking the stock relative to other stocks in the enhanced equity portfolio, based upon the total score.
• ETF Exchange Traded Funds
• FIG. 1 is a flow chart of a preferred embodiment of the portfolio enhancement method according to the invention.
• FIG. 2 is a flow chart of a preferred embodiment of the present invention detailing the corporate governance and financial performance criteria of the stock scoring process.
• FIG. 3 is a performance chart empirically illustrating the overperformance of the present invention versus the FTSE Europe (ex Switzerland) benchmark in the ABF Europe Valeur Actionnariale experimental fund.
• the portfolio enhancement is achieved by an architecture relying on inputs screened from the following three mam sources in the Database Screening Process 2: Desk Research 4; Field Research 6 and Experimental Feedback 8.
• the data gleaned from the Database Screening Process 2 is then input into the Stock Scoring Process 10 with the ultimate goal of enhancing 16 an equity portfolio.
• Data gathered on individual stocks is stored on an information database for later retrieval and use with a stock scoring computer.
• the prime objective of Desk Research 4 is to evaluate the impact on equity markets of the views expressed on major corporate governance and shareholder value issues, by pension fund officials, and other leading institutional investment opinion leaders. Its secondary objective aims at collecting information on the views of other leading corporate governance and shareholder value players, whose behavior may also impact equity markets, e.g.: corporate and/or regulatory officials, securities analysts, financial advisors, lawyers, journalists, academics, and the like.
• the Desk Research 4 is focused on a continuous worldwide screening of the most relevant articles, books, codes of best practices, reports, statements, speeches, TV shows, Web sites and other public releases on major corporate governance and shareholder value issues.
• the Desk Research 4 can be facilitated by relying on the information released by Bloomberg, NewsEdge, Reuters, WSJ.com, or other large-scale diversified business data suppliers, as well as by more specific corporate governance data suppliers, e.g.: Davis Global Advisors, Deminor, Governance Publishing and Information Services, investor Responsibility Research Center (“IRRC”), Institutional Shareholder Services (“ISS”), Lens's Corporate Library, Pensions Investment Consultants (“PIRC”), and Proxinvest, among others.
• IRRC investor Responsibility Research Center
• ISS Institutional Shareholder Services
• PIRC Pensions Investment Consultants
• the Field Research 6 aims at periodically monitoring the views expressed by the aforesaid opinion leaders on major corporate governance and shareholder value issues. For this purpose, a series of surveys carried out by mail, e-mail, telephone, or direct contacts are required among a representative sample of these opinion leaders.
• Samples of 300, or more, opinion leaders can be drawn up for interviews among influential pension fund representatives, mutual fund managers, and insurers.
• the samples can be structured according to the sizes of the equity portfolios held by each group of opinion leaders.
• Each value driver criterion and sub-criterion can be rated by the respondents on a scale of 0 to 10, for example:
• Each one of the ten main value driver criteria can also be rated by the respondents on a scale of 0 to 10 by comparison to each other, so as to weight their relative importance, e.g.:
• the surveys can be carried out once a year, or every six months, if considered required by the evolution of the consensus.
• Experimental Feedback 8 is the third component of the Database Screening Process 2. Analysis of the performance attribution of an experimental fund (should one be available) can provide a comprehensive heuristic platform for assessing the impact of the corporate governance and shareholder value related driver criteria.
• FIG. 3 is a graph that demonstrates the overperformance of the portfolio of the ABF Europe Valeur Actionnaiiale Fund enhanced by the present invention in relation to a benchmark index, in this case the FTSE Europe (ex Switzerland).
• the comparison begins in January 1998 and extends to January 2001, a time period of 3 years.
• three years is the standard time period required for proving the efficiency of fund enhancement theories and methods.
• the corporate governance enhanced fund has thus far outperformed the benchmark by over 8%.
• the aforesaid Data Base Screening 2 merely aims at capturing a comprehensive amount of relevant information, which can be sieved through the sensitive lens of the value driver criteria of the Stock Scoring Process 10. That is, the data input from the Data Base Screening Process 2 feeds the value driver criteria and subcriteria driving the Stock Scoring Process 10.
• Corporations are rated according to whether they outline, in their annual reports or in other corporate documents, the corporate governance code to which they adhere, e.g.: their own corporate code, their national code (like the Cadbury Code in the UK, or the Vienot Code in France), or an international code like the ICGN or the OECD Codes.
• Voting right discriminatory privileges are under-rated, e.g. higher voting rights such as the double-voting privilege favoring certain specific shareholders, or the "golden share" privilege of national state organizations.
• Additional Committees e.g. the Strategic Committee, which could include executive directors contribute to upgrade the rating of the stock.
• Remuneration policies should be congruent with shareholder interests and be subject to performance measurements, based on objective metrics, e.g. total shareholder returns matched against a peer group benchmark, or returns on net assets in excess of capital costs (e.g. Stern Stewart Co. ' s EVA ⁇
• High ratings are awarded according to the level of stock incentives granted to both board directors and executives, provided that these incentives are not affected by re-pricing loopholes and do not contribute to either short term speculative market bubbles, or to stock value dilutions.
• High ratings reward the ratio of the corporate capital owned by employees, through ESOPs, or other stock incentive programs.
• Corporations can be rated according to their earnings per share (' ⁇ PS") growth projections, both individually and compared to their peer group benchmarks.
• the analysis could be refined, by benchmarking either Operating Cash How data or Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), or other earning projections, whenever required and feasible.
• the projections can be based on corporate forward-looking statements, blended with consensus forecasts of securities analysts. Their "warning flags", indicating likely earnings surprises, can also be relied upon for rating purposes.
• the earning projections could be rated (both in absolute terms and compared to their respective peer group benchmarks) as follows:
• FGV Future Growth Value
• EV Enterprise Value
• P/E Price/Earning ratios
• P/E ratios could be replaced by more reliable ratios of Enterprise Value (EV amounts to market value + net debt) to either Operating Cash Flow or EBITDA, should investment professionals generally favor the adoption of one of the latter ratios in the future.
• Enterprise Value EV amounts to market value + net debt
• EBITDA Operating Cash Flow
• the selection, rating, weighting and scoring 10 of the aforesaid criteria and sub-criteria 12 and 14 are not constant. They fluctuate according to the inputs retrieved from the Data Base Screening Process 2.
• the stocks can be rated by the aforesaid criteria and sub-criteria on a scale of 0 to 10 for each criterion, or by any equivalent scale. These ratings can then be weighted according to the impact on equity markets of each value driver criterion, detected during the Data Base Screening Process 2.
• Stocks can then be ranked according to their Total, e.g.
• Such a ranking facilitates the Portfolio Stock Enhancement Process 16, as it allows the stocks to be regrouped into three categories, for example:
• the portfolio stock enhancement, or tilting, process 16 can vary, according to the types of portfolios considered.
• the corporate governance scores 12 alone could also be relied upon for enhancing conventional "stock picking active" portfolios.
• the latter could be managed with financial criteria differing from the aforesaid financial criteria 14.
• the portfolio can be structured so as to match the risk profile of its selected benchmark with "Tracking Errors" averaging, for instance, 2 to 3 % per annum.
• the portfolio should in principle be periodically rebalanced, so as to up-date the inputs emerging from the Data Base Screening Process 2 and to stamp the impacts of the latter on the Stock Scoring Process 10.
• the portfolio should also be re-balanced to match the changes occurring in the underlying indexes.
• FIG. 4 a computer system suitable for implementing the methods discussed above is shown in more detail.
• the individual components of the system are shown schematically and it will be apparent to the skilled reader that any appropriate processing/input/output/memory, storage or database components can be used as appropriate.
• the individual components can be provided in a single entity or can be distributed across a network as appropriate.
• a computer 400 includes an input/output module 402, a processor module 404 and a data storage or database module 406, all arranged to communicate with one another hi any appropriate manner as will be well known to the skilled reader.
• the input/output module 402 receives an input 408 from and provides an output 410 to a processor 412 such as a personal computer (PC) or any other appropriate resource either by direct link or via a network 414 such as the internet.
• a processor 412 such as a personal computer (PC) or any other appropriate resource either by direct link or via a network 414 such as the internet.
• the input/output module 402 receives as an input a stock identifier representing a stock chosen to be included in an enhanced equity portfolio. Also received as an input is a set of scores objectively assigned to respective criteria attributed to the stock. The criteria are selected according to their relevance to the stock performance and the scores assigned to the criteria can be determined using any of the techniques described in more detail above.
• the input/output module 402 can further receive a predetermined weight assigned to each criteria for processing and storage for later use in database 406.
• the database 406 can store a table of data including a stock identifier for each stock, the relevant criteria for each stock and the score and predetermined weight attributed to each criterion.
• the input/output module 402 and/or database 406 send and inputs the score and predetermined weight for each criterion to a processor 404.
• the processor 404 computes a subtotal number for each criterion as the product of each score and the corresponding predetermined weight.
• the processor further computes a total number comprising the sum of the subtotal numbers for the criteria.
• the processor transmits the subtotal number and total number to the database where those numbers are stored against the stock together with the criteria, scores and predetermined weights, which can be stored in any appropriate tabular or other form.
• information from the database for scoring stocks determined at a user module 412 can be retrieved from the computer 400 for example by entering a command to retrieve information concerning pre-processed stocks which is received at the input/output module 402 and processed by the processor 404 to retrieve the relevant data from the database 406, or by inputting new stock and criteria information which is processed as described above and output to the user module.

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Cited By (10)

• 2005
  • 2005-02-25 EP EP05707629A patent/EP1851694A1/fr not_active Withdrawn
  • 2005-02-25 WO PCT/EP2005/001997 patent/WO2006089565A2/fr not_active Ceased

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