More Information

The following paragraphs summarize the methodology used by Valuation Technologies to determine the investment styles of investment managers and mutual funds. It is important to keep in mind we are only examining the equity portion of the portfolio. A manager may describe the fund as "Income", where the income portion of the portfolio is obtained from fixed income investments and the equity portion of the portfolio is made up of well-established long-term growth companies like Intel and McDonald's.

Also, we determine equity style by direct examination of the holdings of the portfolio rather than inferring style from performance measurement or relying on the manager's literature or statements during interviews.

The styles we will provide are a combination of value and size. Value and size are each viewed as a continuum. Our descriptions are "value", "value/growth", "growth" and "aggressive growth". Size is described as "large", "medium" or "small". The descriptions are defined quantitatively based on the average numerical rank of the companies in the portfolio. That process is defined below.

The Growth - Value Continuum

Academics have pretty much settled on book-to-price ratio as the most consistent measure of value. Companies with a high book-to -price ratio are considered value and companies with a low book-to-price ratio are considered growth companies. In addition, companies in the lowest 25 percent of book-to-price are to be considered super-growth companies and account for much of the market performance difference between growth and value indices.

Book-to-Price Ratio

Typical book-to-price ratio over the past five years. It is calculated as the average book value per share divided by the average year-end closing price. This is a good measure of fundamental value, although accounting events such as write-offs for FASB 106 can make book value somewhat erratic. For this reason we add Growth Factor(see below) to the calculation to determine where we use a most recent rolling 12 months-end for price. Book value is updated quarterly.

Growth Factor (Risk Model Factor)

Consists of up to 13 measures of historical and projected growth. These include historical growth in earnings and assets as well as measures of dividend policy used to help forecast growth.

The Large - Small Continuum

Size (Risk Model Factor)

Includes market capitalization as well as total assets of the underlying firm. We include the total assets to account for companies such as Netscape Communications. Few institutions consider Netscape a large company, yet if we calculated market capitalization alone, the presence of companies like Netscape in the portfolio could give the misleading impression that the institution invests in large companies.

The Methodology

Company Model Scores

The first step in analysis of manager style is the examination of the stocks themselves. Our database, updated monthly, contains both types of models and related forecast returns for each of over 7000 stocks and ADR's.

For each variable, such as book-to-price, after the ratios are calculated, the companies are divided into groups based on their ratios. For example, if we were grouping in percentiles, the universe of companies would be divided into 100 groups based on their ratios. After the stocks are divided into groups, each group is assigned a score ranked from high to low. The top group receives the highest score and the bottom group receives the lowest score.

Standardizing Scores

To better compare stocks across variables or over time, we then standardize the scores. Standardizing preserves the order of the scores, but rescales the distribution so it has a set mean and standard deviation. In effect, it puts the results of the several variables all on the same scale.

It is most common to standardize variables to have an average of zero and a standard deviation of one. By standardizing a variable this way, you can immediately determine a stock's relative position above or below the universe average, without looking at any other numbers. A stock with a score of 1.5 is a stock that scores 1.5 standard deviations above average with respect to that variable. Any stock whose score is negative is below average.

Truncating

In our analysis, it is useful to truncate the distribution of company scores to exclude any extreme values that may have resulted from data anomalies. Since many of our analytical techniques are based on a variable's squared value, extreme values can affect results drastically. Generally, we truncate the distribution of company scores to an outer limit of three standard deviations from the mean. This results in company scores between 3 and -3, with zero representing the mean.

More technically, winsorization is the technique we use to truncate distributions. It is a repeating, circular procedure where outlying values are pulled in towards the center of the distribution. This lowers the standard deviations set in our original standardization. Re-standardizing to force the mean and standard deviation back to zero forces some results beyond the 3, -3 limits, so we repeat the process. This brings the outlying extremes closer and closer to 3, -3 with each repeated calculation.

To avoid unnecessarily long calculations, we allow the final distribution to have a few scores slightly outside the three standard deviation limit. This is why a few ratios will have company scores that may lie between 3 and 3.2 or between -3 and -3.2.

We now have company scores for each of the variables mentioned earlier which determine "value-growth" and "size". The scores represent the relative position of that company regarding its "value-growth position" and "size".

Portfolio Analysis

Our method of portfolio analysis is based on an examination of the equity holdings as reported in the managerÌs quarterly filings with the SEC and/or the quarterly reports of public mutual funds.

First, we determine three components of the portfolio; the current holdings, stocks which were net purchases during the previous quarter and stocks which were net sales. Beginning with the institution's net purchases, for each variable we determine the highest and lowest company scores, as well as the capitalization weighted mean and standard deviation of company scores. This statistical analysis is repeated for the current portfolio holdings and for the net sales. The result is a statistical picture of the portfolio activity as it relates to "value-growth" and "size".

If the mean score of an institutionÌs portfolio holdings is greater than 0.5, the portfolio is labeled Value. A score between +0.5 and -0.5 inclusive is Value/Growth. Between -0.5 and -1.0 inclusive indicates Growth. Less than -1.0 is Aggressive Growth.

For example, for investor ABC we can determine that the high and low scores in "value-growth" are -0.5 and -2.8 respectively, and the mean score is -2.1. These scores are in the lowest 25 percent of all "value-growth"scores and therefore represent an "aggressive growth" average equity portfolio style.