GB2420425A

GB2420425A - Evaluating investment products

Info

Publication number: GB2420425A
Application number: GB0425265A
Authority: GB
Inventors: Tarlock Randhawa
Original assignee: INVESTEC ASSET MAN Ltd
Current assignee: INVESTEC ASSET MAN Ltd
Priority date: 2004-11-16
Filing date: 2004-11-16
Publication date: 2006-05-24
Also published as: GB0425265D0

Abstract

Apparatus 1 for evaluating a plurality of investment products comprises a database configured to store details of the plurality of investment products, means for updating the details stored in the database in accordance with received data 5a-c. A processor is operable to process the details stored in the database to calculate a value for each of the plurality of investments, each value being indicative of the future performance of the corresponding investment. The investment performance values are output in a ranked list. The investment products may be stock or other financial instruments.

Description

INVESTMENT PRODUCT EVALUATION APPARTUS AND METHOD

This invention relates to an apparatus for processing financial data for a plurality of investment products, and a method performed by such an apparatus.

The running of an investment fund involves the buying and selling of investment products, such as company shares, with the aim of getting the best return from the investment fund. Typically, each investment fund has rules indicating the type of investment products which may be incorporated in the investment fund.

Even so, many fund managers need to track the performance of thousands of investment products when deciding how the investment fund should be invested.

In the past, this has relied upon the fund manager regularly reassessing each investment product.

A number of commercial services provide financial information relating to investment products, and with the steady improvement in data telecommunication the amount and availability of this information has steadily increased. In practice, many fund managers do not make full use of the available financial information because of Lhe difficulty of analysing the large volume of available financial information.

Further, fund managers typically have prejudices for and against particular investment products, and these prejudices cloud how financial intormation tor these investment products is assessed.

The aim of the present invention is to enable fund managers to make more efficient use of available financial information.

ccording to an aspect of the invention, there is provided an investment product evaluation apparatus which includes a database that is configured to store details of a plurality of investment products. The 1 5 investment product evaluation apparatus is able to receive financial data for the plurality of investment products and update the details stored in the database accordingly. The investment product evaluation apparatus is then able to calculate a value for each of the plurality of investment products which is indicative of the future performance of the investment.

The investment product evaluation apparatus performs an objective assessment, and is therefore not affected by any fund manager's individual prejudices. Further, the values enable a fund manger to quickly identify stocks which are predicted to perform well and accordingly may be worth buying, and stocks which are predicted to perform badly and therefore may be worth selling. The fund manager is then able to allocate time efficiently to carry out further investigations into the investment products. Typically, these investigations will include a due diligence exercise to check the accuracy of the financial information used by the investment products evaluation apparatus, and to check if there is any other pertinent information.

Preferably, the investment product evaluation apparatus calculates the value for each investment based on four criteria, namely: - the historical success of the investment product in creating wealth for investors; - the difference between the cost of the investment product and its estimated worth; - a review of the changes in analysts' expectations for the performance of the investment product; and - a comparison of the current performance trend of the investment product and the performance of the market as a whole.

Preferably, the investment product evaluation apparatus outputs a list ranking the investments in value order.

Conveniently, the database can be implemented on the ACCESS database produced by the Microsoft Corporation.

An embodiment of the invention will now be described with reference to the attached Figures in which: Figure 1 schematically shows a networked computer system including an investment product evaluation apparatus; Figure 2 schematically shows the main components of the investment product evaluation apparatus illustrated in Figure 1; Figure 3 schematically shows the contents of ACCESS database data stored in the investment product evaluation apparatus illustrated in Figure 2; Figure 4 schematically shows the contents of tables of data stored in the ACCESS database data illustrated in Figure 1; and Figure 5 shows an exemplary report produced by the investment product evaluation apparatus illustrated in Figure 2.

As shown in Figure 1, in an embodiment of the invention an investment product evaluation apparatus 1 is connected, via a communications network 3, to three servers 5a to Sc which provide data relating to the performance of a plurality of investment products. In this embodiment, the first server 5a is administered by CSFB Holt Value Associates, the second server is administered by Reuters and the third server 5c is administered by FACTSET. The communications network 3 may include local area networks (LANs), wide area networks (WANs) and the internet.

The CSFB Holt server 5a provides financial data relating to the performance of a plurality of companies whose stocks are evaluated by the investment product evaluation apparatus. This financial data includes cash-flow return on investment (CFROI) data, which is a way of measuring the return on the assets for each company. CFROI data has the advantage that the return on assets is measured on a cash basis rather than an earnings basis, and is therefore less susceptible to manipulation by techniques such as aggressive accounting and pro forma calculations. The CSFB Holt server 5a also provides cost of capital data (i.e. the mean return expected for a particular type of investment product), and a best target price indicative of the worth of the investment product.

The Reuters estimates server 5b provides information relating to analysts' projections for the performance of different stocks. In particular, the Reuters estimates server Sb provides information relating to earnings per share estimates for the different stocks and also whether analysts have upgraded or downgraded the stock.

The FACTSET server 5c provides financial data relating to the actual market price for the investment products.

Figure 2 shows the main components of the investment product evaluation apparatus 1. In this embodiment, the investment product evaluation apparatus 1 is a conventional computer having novel software stored therein for implementing the invention. As shown in Figure 2, the investment product evaluation apparatus 1 includes a conventional central processing unit (CPU) 11 which carries out processing operations, a conventional hard disk 13 storing various software programs, a conventional volatile memory 15 which is used by the CPU 11 when performing processing operations, a conventional network interface 17 and a conventional operator interface 19.

The network interface 17 allows data to be input into and output from the investment product evaluation apparatus 1 in the form of a signal 21. In this embodiment, the operator interface 19 includes a CD- ROM reader (not shown) via which data stored on a CD- ROM 23 can be input into the investment product evaluation apparatus 1.

In this embodiment, among other software programs, the hard disk 13 stores a conventional operating system 25, the ACCESS database program 27 provided by the Microsoft corporation and the EXCEL spreadsheet program 29 provided by the Microsoft Corporation. The hard disk 13 also stores ACCESS database data 31 which is custom data associated with the ACCESS database program 27, and EXCEL spreadsheet data 33 which is custom data associated with the EXCEL spreadsheet program 29. The ACCESS database data 31 and the EXCEL spreadsheet data 33 include instructions which enable the investment product evaluation apparatus 1 to implement the invention.

Figure 3 shows in more detail the ACCESS database data 31 stored in the hard disk 13. As shown, the ACCESS database data 31 includes tables 41 which store the data which is to be processed using the ACCESS database program 27. The ACCESS database data 31 also includes a main switchboard 43 which provides a user interface for controlling the operations performed by the ACCESS database program 27, forms 45 which are used to enter data to be stored in the tables 41, queries 47 which are used to instruct the ACCESS database program 27 to perform processing of the data stored in the tables 41, reports 49 which are used to present the results of the processing of the queries 47, macros 51 and modules 53 which contain instructions allowing various processing procedures to be implemented.

The tables 41 store data for a plurality of stocks.

Figure 4 shows in detail the main data stored for each stock, namely: identity information 61 identifying the stock; - CFROI five year median data 63; - CFROI data for the last financial year (LFY) 65; - CFROI data for the year before the last financial year 67; - CFROI data for the year two years before the last financial year 69; - cost of capital data 71; the best target price 73 provided by the CSFB Holt server 5a; - data 75 relating to the change in earnings per share estimates; upgrade/downgrade data 77; and - market price data 79.

In this embodiment, the identity information 61 is the name for the stock used by the CSFB Holt server 5a.

As those skilled in the art will appreciate, ACCESS is a relational database program and therefore the tables 41 may contain links to each other in order to facilitate data entry and preserve data integrity.

The main switchboard 43 provides a user interface via which the most common functions of the database are activated. In particular, the main switchboard 43 provides a user interface including buttons for importing new data and for processing the stock data to score each stock.

In this embodiment, the data from the CSFB Holt server 5a and the FACTSET server 5c is imported first into EXCEL, and subsequently exported from EXCEL into ACCESS. The data from the Reuters Estimates Server 5b is imported directly into ACCESS.

The queries 47 include a query which processes the data stored for each stock to calculate a value indicative of the likelihood of the value of the stock increasing. This value is calculated based on scores relating to four criteria, namely a strategy score indicative of the extent to which a company has been able to generate wealth for its shareholders, a valuation score indicative of the gap between a "fair value" for the stock and the current share price, a dynamics score indicative of the change in analysts' predictions for the stock and a technicals score indicative of the favourability of share price trends.

The strategy score, valuation score, dynamics score and technicals score will now be described in more detail.

The Strategy Score The stock market valuation of a company should reflect the ability of the company to create wealth for its shareholders. Increased wealth is created by increasing the returns generated on invested capital and increasing the invested capital. However, unless the returns are above the cost of capital, a company is in effect destroying value for an investor. l0

The investment product evaluation apparatus 1 calculates scores for three elements which are then averaged to give the Strategy Score.

The first element is calculated from the CFROI five year median data 63. If the CFROI five year median is greater than 12%, then a score of four is awarded. If the CFROI five year median is between 6% and 12%, then a score of three is awarded. If the CFROI five year median is between 2% and 6%, then a score of two is awarded. Otherwise a score of one is awarded. In this way, the stocks of companies which are most increasing returns are preferred.

The second element is calculated from the trend of the CFROI over the last three years, using the CFROI for the last financial year 65, the CFROI for the year before the last financial year 67 and the CFROI for the year two years before the last financial year 69.

If the CFROI has consistently gone up, then a score of four is awarded. If the CFROI has consistently fallen, then a score of one is awarded. Otherwise, a neutral score of two and a half is awarded.

The third element is indicative of the growth strategy for an investment product. If the investment product has historically generated a CFROI which is greater than its cost of capital and it has grown its assets, then a score of four is awarded. If the investment product has historically scored a CFROI lower than its cost of capital and it has shrunk its assets then a score of three is awarded. If the company has historically generated a CFROI greater than its cost of capital but has shrunk its assets then a score of two is awarded. If the investment product has historically had a CFROI which is less than its cost of capital but has grown assets then a score of one is awarded. In this way, companies which react appropriately to secure higher returns are preferred.

As mentioned above, the Strategy Score is calculated by averaging the scores for the first, second and third elements.

The Valuation Score The Valuation Score for an investment product is calculated based on the percentage difference between the Holt best target price 73 and the current market price (stored in the market price data 79) for all of the investment products. In particular, the investment products are ranked in order of this percentage difference, and then split into quartiles on the basis of this ranking. The investment products in the first quartile (i.e. those with the highest percentage difference between the Holt best target price 73 and current market price) are awarded a Valuation Score of four, the investment products in the second quartile are awarded a Valuation Score of three, the investment products in the third quartile are awarded a Valuation Score of two and the investment products in the fourth quartile are awarded a Valuation Score of one.

The Dynamics Score The Dynamics Score is calculated by assessing the manner in which analysts revise their predictions relating to an investment product. Typically, analysts under-react to new information. This under- reaction means that share prices do not adjust immediately to the extent warranted by new information. Consequently, revisions to profit forecasts exhibit serial correlations. That is, one positive revision tends to be followed by another positive revision.

The investment product evaluation apparatus 1 calculates the Dynamics Score by averaging scores for two elements.

The first element relates to the changes in the three month earnings per share estimates for the present financial year and the year following the present financial year. The three month period is broken up into three monthly periods, with the data relating to the most recent month given a greater weight than its previous month. In this embodiment, the weightings for the most recent month, the month before the most recent month and the month two months before the most recent month have been respectively set at 50%, 30% and 20%. All the stocks are ranked and then split into quartiles on the basis of this ranking. Those stocks in the top quartile are awarded a score of four, those stocks in the second quartile are awarded a score of three, those stocks in the third quartile are awarded a score of two, and those stocks in the bottom quartile are awarded a score of one.

The second element reflects whether analysts have been upgrading or downgrading the stock. Firstly, for each stock the ratio of (i) the difference between the number of analyst upgrades and the number of analyst downgrades for the stock and (ii) the total number of analysts looking at the stock is calculated for each of three distinct monthly periods for the present financial year and the next financial year. These ratios are weighted in the same manner as for the first element for the dynamics score, and then the stocks are ranked and split into quartiles. Those stocks in the top quartile are awarded four points, those stocks in the second quartile are awarded a score of three, those stocks in the third quartile are awarded a score of two, and those stocks in the bottom quartile are awarded a score of one.

As mentioned above, the Dynamics Score for each stock is calculated by averaging the scores for the first and second elements.

The Technicals Score The Techriicals Score is calculated based on the market price data 79. In the short term, market prices tend to take a while to adjust correctly for new data, whereas in the long term there tends to be an over- reaction. The technicals score particularly reflects the under-reaction in the short term (the over- reaction in the longer term being accounted for in the valuation score) The investment product evaluation apparatus 1 calculates the Technicals Score using a relative stock price which is calculated by dividing the current share price by a market average index, in this embodiment the MSCI world index. The forty-week moving average of this relative stock price and the fifty-day moving average of this relative stock price are monitored. In addition, the standard deviation of the last 27 weeks closing (Friday) share prices is calculated as a measure of the volatility of the share price.

If a stock has a current relative share price above the forty-week moving average and the fifty-day moving average, the forty-week moving average is rising and the volatility is rising, then the stock is awarded a Technicals Score of four.

If a stock has a current relative share price above the forty-week moving average and above the fifty-day moving average, the forty-week moving average is rising and the volatility is falling, then the stock is awarded a Technicals Score of 3.25.

If a stock has a current relative share price which is between the forty-week moving average and the fifty- day moving average, or if the forty-week moving average is moving in the opposite direction to the relative share price, then the stock is awarded a Technicals Score of 2.5.

If a stock has a current relative share price which is below the fortyweek moving average and the fifty-day moving average, the forty-week moving average is falling and the volatility is falling, then the stock is awarded a Technicals Score of 1.75.

If a stock has a current relative share price which is below the fortyweek moving average and the fifty-day moving average, the forty-week moving average is falling and the volatility is rising, then the stock is awarded a Technicals Score of one.

In this embodiment, the investment products evaluation apparatus 1 calculates the final value for an investment product by adding together the Strategy Score, the Valuation Score, the Dynamics Score and the Tecimicals Score.

The investment product evaluation apparatus 1 produces a list which ranks the stocks in order of the total score. This list can then be used by an investment fund manager. In particular, the investment fund manager is able to highlight high-scoring stocks which may be worth buying and also identify low-scoring stocks which may be worth selling. The investment fund manager is then able to apportion time appropriately between these stocks.

In particular, the investment product evaluation apparatus 1 stores reports 49 which provide information to the investment fund manager. For example, Figure 5 shows an exemplary report highlighting the stocks with the highest scores. As shown in Figure 5, the report has columns giving the Dynamics Score D, the Valuation Score V, the Strategy Score S, the Technicals Score T, the Total Score SIGMa, and the change in the total score SIGMa over one week 1W, one month 1M and three months 3M. From this report, the investment fund manager is able to quickly identify attractive stocks and stocks whose Total Score has changed.

It is not envisaged that an investment fund manager will buy and sell stocks entirely on the basis of the report produced by the investment product evaluation apparatus. In particular, it is envisaged that some form of due diligence operation will always be performed. However, the report produced by the investment product evaluation apparatus 1 gives an objective assessment of which stocks need to be investigated in further detail.

Modifications and Further Embodiments In the described embodiment, the ACCESS database program has been utilised. It will be appreciated that different database programs could alternatively be used.

The manner in which the score for each stock is calculated can be modified from that of the described embodiment while maintaining the advantages of the invention. In particular, there are many possible ways of objectively ranking stocks.

Preferably, the performance of the ranking technique used by the investment product evaluation apparatus 1 is frequently back-tested using old financial data.

Further, modifications to the ranking technique can also be tested using old financial data to check if the modifications lead to an improvement in performance.

Although the described embodiment of the invention comprises computer apparatus and processes performed in the computer apparatus, the invention also extends to computer programs, particularly computer programs on or in a carrier, adapted for putting the invention into practice. The program may be in the form of source code, object code, a code intermediate source and object codes such as in a partially compiled form, or in any other form suitable for using the implementation of the processes according to the invention.

The carrier may be any entity or device capable of carrying the program. For example, the carrier may comprise a storage medium, such as a ROM, for example a CD-ROM or a semi-conductor ROM, or a magnetic recording medium, for example a floppy disk, or a hard disk. Further, the carrier may be a transmissible carrier such as an electronic or optical signal which may be conveyed via electrical or optical cable or by radio or other means.

When the program is embodied in a signal which may be conveyed directly by cable or other device or means, the carrier may be constituted by such cable or other device or means. Alternatively, the carrier may be an integrated circuit in which the program is embedded, the integrated circuit being adapted for performing, or for use in the performance of, the relevant processes.

Although in the described embodiments the invention is implemented by software, it will be appreciated that alternatively the invention could be implemented by hardware devices, or a combination of hardware devices and software.

Claims

1. An apparatus for evaluating a plurality of investment products comprising: a database configured to store details of the plurality of investment products; means for updating the details stored in the database in accordance with received data; and means for processing the details stored in the database to calculate a value for each of the plurality of investments, each value being indicative of the future performance of the corresponding investment.

2. An apparatus according to claim 1, further comprising means for outputting a list ranking at least some of the investment products in value order.

3. An apparatus according to claim 1 or 2, wherein the database is configured to store data relating to the cash flow return on investment for each investment product which is used by the processing means to generate said value for the investment product.

4. An apparatus according to any preceding claim, wherein the database is configured to store data relating to the current market price for each investment product and the estimated value of each investment product, wherein the processing means is operable to compare the current market price and the estimated value for each investment product, and to calculate the value for each investment product using the result of the corresponding comparison.

5. An apparatus according to any preceding claim, wherein the database is configured to store information relating to the change in analysts' projections for each product, which information is used by the processing means when calculating the value for each investment product.

6. An apparatus according to any preceding claim, wherein the database is configured to store market price data over a period of time for each investment product, which market price data is used by the processing means when calculating the value for each investment product.

7. A method of operating a computer apparatus to evaluate a plurality of investment products, the method comprising the steps of: storing received information relating to the plurality of investment products; processing the information stored in the database to calculate a value for each of the plurality of investments, each value being indicative of the future performance of the corresponding investment; and outputting a report identifying the calculated value for at least some of the plurality of investments.

8. A method according to claim 7, wherein said outputting step comprises outputting a list ranking at least some of the investment products in value order.

9. A method according to claim 7 or 8, wherein the storing step comprises storing data relating to the cash flow return on investment for each investment product which is used in the processing step to generate said value for the investment product.

10. A method according to any of claims 7 to 9, wherein the storing step comprises storing data relating to the current market price for each investment product and the estimated value of each investment product, wherein the processing step comprises comparing the current market price and the estimated value for each investment product, and calculating the value for each investment product using the result of the corresponding comparison.

11. A method according to any of claims 7 to 10, wherein the storing step comprises storing information relating to the change in analysts' projections for each product, which information is used in the processing step when calculating the value for each investment product.

12. A method according to any of claims 7 to 11, wherein the storing step comprises storing market price data over a period of time for each investment product, which market price data is used in the processing step when calculating the value for each investment product.

13. A storage device storing instructions including instructions for implementing the method claimed in any of claims 7 to 12.

14. A signal conveying instructions including instructions for implementing the method claimed in any of claims 7 to 12.