by Steven I. Levey
Most asset allocation programs are based on the theories of Harry Markowitz, who is considered the grandfather of modern portfolio theory and the efficient frontier. In 1952, Professor Markowitz published a formal model of portfolio selection embodying diversification principles, which earned him a Nobel Prize for economics in 1990.
Product infoWATS Advisor Edition
EnCorr Optimizer V. 8.3
Allocation Master V. 6.9
ICE/Integrated Capital Engine
Cheshire Asset Allocation Planner V. 2002B2
Blueprint V. 5.9.0
Here are some old favorites with new features, as well as newer programs with variations and interpretations on MPT, asset allocation and the efficient frontier, which utilize standard financial planning applications to determine the ideal asset allocation to meet client goals.WATS Advisor Edition
WATS Advisor Edition is a unique program that combines accumulation, retirement and investment policies in determining an investment portfolio. WATS incorporates the methodology used in the Trinity Study and elaborates on it, including WATS’ new technology for portfolio optimization. Philip Cooley, Daniel Walz and Carl Hubbard, professors of economics from Trinity University in San Antonio, wrote the Trinity Study.
WATS uses optimal asset allocations using a computational technique known as simulated annealing, with three studies, including "Maximum Sustainable Withdrawal Rates with Varying Historical Success Rates Using Large Cap Stocks, Corporate Bonds and U.S. T-Bills. Ending Value Goal: Above Zero (Don’t Go Broke)" (data from 1946 to 2000); "Maximum Sustainable Withdrawal Rates with Varying Historical Success Rates Using Large Cap Stocks, Corporate Bonds and U.S. T-Bills. Ending Value Goal: Equal or Greater than Original Corpus" (data from 1946 to 2000); and "Maximum Sustainable Withdrawal Rates with Varying Historical Success Rates Using Large Cap Stocks, Corporate Bonds and U.S. T-Bills. Ending Value Goal: Equal or Greater than Inflation-Adjusted Corpus" (data from 1946 to 2000).
A click on the accumulation tab reveals a place for first and last name, salary, holdings, loans, years to calculate, annual increase and funding timing. The timing can be set to beginning of period, end of period and 50/50. A final touch is the company contribution percentage and maximum dollars to contribute. There is a box for portfolio allocation such as large cap, small carp, bonds, etc. Clicking on the investment category reveals monthly returns from 1926 to present based upon Ibbotson statistics. There is an eye button, which when pressed shows a new screen that has data from 1930 to present with highs, and lows by period. Investment results include median, high range, low range, average gain and various standard deviations from -2 to +2.
Other buttons generate charts and reports for rate of return and standard deviation, funding analysis, market vs. fixed return analysis, portfolio success rates, distributions, rolling return periods, scatter graphs showing risk vs. reward, growth of $100 per cumulative premium and, of course, the efficient frontier correlations.
The program has calculator options that include date range, retaining existing calculations, placing markers on the calculations to track them, and premium return indexes. WATS incorporates Black Box and Portfolio Stressor to work together to help the planner find an investment strategy that works for their clients. Portfolio Stressor stresses the client portfolio to find out, historically, how high a withdrawal rate the portfolio can sustain. Black Box finds maximum sustainable withdrawal rates and portfolios capable of achieving those rates for investors concerned with withdrawals or spending policies.
To find optimal portfolios, Black Box runs two processes - a systematic process creates portfolios by varying the percentage invested in each available asset by 5 percent at a time, while the optimization process, where the best portfolios from the systematic testing are kept and refined, attempts to find better portfolios.
This is done through simulated annealing, in which many more portfolios are tested to see if better portfolios exist. The planner needs to input assets, beginning and ending year, time horizon-number of years the withdrawals will take place, success rate to be considered, timing of withdrawals, schedule of withdrawals and the ending value goal.
EnCorr Optimizer V. 8.3
EnCorr Optimizer is one of an integrated series of programs that also includes the following tools:
• Analyzer, to access a central database to perform historical markets data analysis;
• Inputs Generator, to refine and generate the necessary forecast statistics including return, standard deviation and correlation for optimization;
• Attribution, to analyze manager style and attribute performance to investor decisions;
• Allocator, to implement asset allocation policy by selecting the appropriate individual managers or mutual funds; and,
• Scenario Builder, to analyze what-if investment scenarios.
The program opens with tabs for start up, inputs, constraints, back solve and inputs summary. Clicking on the start up tab shows available assets to allocate, such as domestic large and small stock. Inputs reveal the expected return, standard deviation, yield and current holding of the selected assets classes.
The constraints tab allows for the customization of minimum and maximum holding, cost to increase and decrease constraints, and locking. Back solve lets the user enter the current expected return, the optimal expected return, difference, and fix. The inputs summary has room for correlation statistics, such as to foreign stocks or 30-day T-bills.
After the data is entered, four separate charts are displayed by the click of the optimize button - Portfolio Statistics, Portfolio Contents, Efficient Frontier and Return Percentiles. A statistics button in the Portfolio Statistics chart allows the user to add and delete Sharpe ratio, yield, standard deviation and probability, among other statistics.
The menu bar on top of the program has a frontier feature that allows the user to move the graph and demonstrate the efficient frontier, as well as send the data to PowerPoint, Excel or Word. A forecast option lets the user set the forecast settings, normal distribution, return and wealth percentiles, and target probabilities.
There are many graphs that can be presented, including return a percentiles comparison, a frontier-area graph and pie charts. Once the desired results are obtained, a report in Word can be generated with a single touch that shows all of the charts and results in color. EnCorr also supports the advanced import and export of data, as well as Monte Carlo simulations. EnCorr Optimizer can be integrated with Analyzer, Inputs Generator, Attribution Analyzer, Allocation-Implementation and Scenario Builder to form a formidable investment-planning tool.
Allocation Master V. 6.9
Sungard Online Investment Systems
Allocation Master addresses such categories as Scenario Assumptions, Asset Classes, Client Profiling, Portfolio Holdings, Financial Forecasting, Projected Assets, Monte Carlo Simulation, Implementation Planning, Investment Products and Investment Policy Statements.
The program opens with a client profile, including input for projection period, target return, target assets, and current and future income tax rates. Planner fees can also be input on a percentage basis for non-qualified, qualified and annuity assets. A 10-question risk questionnaire helps grade concerns such as willingness to bear an above-average level of investment risk (volatility) and willingness to maintain investment positions for at least 10 years on a scale of one to five.
Holdings can be input as qualified, non-qualified or annuity with sub-details for asset class, product name, symbol, market value and cost. Goals such as education and retirement, including the cost, duration and growth rate, are then input. Cash inflows such as 401(k) and IRAs, as well as non-qualified savings are easy to enter.
A limit tab is provided with default minimum and maximum percentages for each asset class. The planner can change these and classify them for both qualified and non-qualified assets.
Usable as an educational/information tool, the frontier tab shows a movable colorful graph with both return and standard deviation (risk). The tab also shows current and proposed portfolio characteristics in either dollars or percentages. The comparisons show dollars, percentages and illustrative pie graphs for before-and-after scenarios. The backtest tab can shows many years of return and risk for both proposed and present asset mixes. The specify tab allows the planner to override the defaults and enter specific percentages or dollar amounts for both qualified and non-qualified assets.
The forecast tab provides projections for asset values based upon actual dollars or inflated dollars in either the present or proposed scenarios. The details tab demonstrates current income, capital gains, taxes, financial goals and net changes. The program also has Monte Carlo simulation components built into it.
Featured graphs include the return range, target returns, assets range and target assets over the investment horizon. The implementation area includes listing the proposed asset class and the source of funds if the class is to be increased. A product recommendation space including symbol can also be input. A six-page investment policy statement including summary, objectives, time horizon, risk tolerance, expected performance, asset allocation, monitoring and review, selection criteria, and holding limits with signature and date lines for acceptance and adoption is available at the touch of a button. There is also a great menu for selecting over 50 reports.
ICE/Integrated Capital Engine
The ICE-Integrated Capital Engine (Web/PC) Professional Version possesses a hybrid platform on which to manage portfolios on the Internet through an application service provider-type connection. Logging onto the Internet with a user number and password, the planner can build, model and compare portfolios, do historical hypothetical reviews including financial planning and detailed cash flow analysis. Calculators for retirement, education and major purchases are included, and even offer recommendations to correct shortfalls. ICE is NASD-compliant and can also offer reports, graphs and an investment policy statement.
All reports can be e-mailed and printed. The software also integrates education planning, risk management, net worth and detailed cash-flow statements, portfolio management, retirement planning and investment analysis/scenarios to identify and achieve financial goals. Databases for mutual funds, stocks, variable annuities and closed-end funds are available for purchase.
There are plug-in programs including Monte Carlo simulation and economic/market analysis, and others are under development.
Logging on reveals a screen with tabs for advisor setup, clients and portfolios, assets and securities and import data. Click on advisor setup and advisor personal info, contact data, standard advisor fees, report plug-ins and permissions are available. The clients and portfolios tab reveals client portfolios by name, who created it, date created, value, rate of return, standard deviation and tax status.
Once these statistics are entered, the portfolio builder can be accessed for further analysis and evaluation. Asset, holding percentage, amount, ROR percentages, standard deviation percentage, beginning and ending date, fees, yields, and other headers allow the planner to evaluate the components to be evaluated with ease. There is flexibility to change the portfolio to the planner’s preferences with probability ranges, history estimates, years to hold and tax rates to assess. The planner can then push "optimize the portfolio" button and see a graph of the efficient frontier.
All of the portfolios on file are available for selection on the graph. Securities can be added and deleted easily to change and recalculate the efficient frontier. Portfolios can also be compared and contrasted at the push of a button.
The report builder feature allows the planner to select from over 30 options including an investment policy statement, client-risk questionnaire, and numerous detailed tables and graphs. The program also has a Monte Carlo simulator that produces a table and graph showing the probability of achieving the desired results. A report can be printed or e-mailed after the simulation is run. This program appears to be a worthy Internet successor to the venerable Ramcap and Power Analyzer.
Cheshire Asset Allocation Planner V. 2002B2
Cheshire Software Inc.
The Cheshire Financial Planning Suite consists of eight modules including: Retirement Planning, Monte Carlo Probability Analysis, Asset Allocation Planning, Education Planning, Lump Sum Distribution Planning, Estate & Trust Planning, Net Worth & Cash Flow Planning and Life & Disability Insurance Planning. The suite can be purchased for $1,799 with a $750 annual maintenance fee or modules can be purchased separately. They do share a common data file, so duplicate entry is not required.
The Asset Allocation Planner module starts the program with tabs including method, efficient frontier, proposed portfolio, action plan, general, what to allocate, asset classes, current portfolio and risk questions.
Click on the what to allocate tab and select general savings, education, retirement or new purpose. Proceed to the next section to select assets to be included, such as large cap, small cap, government bonds, corporate bonds and international. Historical data using either rates of return using geometric or arithmetic mean from 1973 to current are included for the selected assets classes. The standard deviation for the selected asset class is also included and a correlation matrix can be accessed and modified if desired.
The planner also has the option to change to expected rate of return, which allows for custom data input. Asset classes not being used can be hidden in the report presentation.
The planner also has the option to implement or not use the risk questions. The risk questions tab offers a series of questions, including number of dependents, anticipated earnings growth, emergency savings, feelings about fixed/variable rates of return, loss tolerance and outperforming the market, unexpected needs, declining stock value, comfort level, rate of return and time horizon.
After these questions are answered, the clients’ assets can be entered in detail in the current portfolio section. Push the investment manager button and portfolio name, type, ticker symbol, number of shares, current value, basis and asset class are easily input. Assets can then be selected for disposition or inclusion in the proposed portfolio. A great utility is the ability to sort, print preview or print this input for review.
The method tab allows the planner to select buttons for the Efficient Frontier with or without the risk questions, manually, or with a pre-selected portfolio. The program employs Microsoft Excel to graph and demonstrate the Efficient Frontier Curve. The Proposed Portfolio tab can then be accessed to shift the asset classes by either percentage or dollar amount. Best and worst case scenarios can be easily illustrated.
The planner can easily select one or many reports, or have the program select what it feels are the most important. The program can also import and export asset class data.
The Action Plan launches a buy-sell wizard that proposes recommendations for re-balancing the portfolio with the best tax consequences by percentage, asset class or ownership. The planner can buy or sell asset classes by amount or percentage. Output includes a color graph with current or proposed assets in dollars or percentages.
The data in the graphs can be toggled to reveal individual holdings by dollars or percentages, taxable or tax-advantaged, whose assets they are (husband, wife, joint etc.) and it also shows rates of return and standard deviation on the bottom. The graphs produced are easy to understand and can be printed in color, as well. A separate module for Monte Carlo simulation can be purchased (it is inside the retirement module).
Blueprint V. 5.9.0
Thomson Financial/ Wiesenberger
Blueprint is an asset allocation client presentation system that must be used in combination with Investment View V. 9 to take advantage of up-to-date databases. It begins with seven buttons including client information, questionnaire, summary, allocation, charts, tables and disclosures.
Click on client information and proceed to client portfolio. The client portfolio button reveals seven asset classifications including capital preservation, income, growth and income, high yield, aggressive growth and international. A specific name and amount of the investment can be entered with ease.
Push the questionnaire button and an eight-part questionnaire with the first question, "What do I most want to accomplish?" appears. Answer choices include preserve asset value, generate high-current income, achieve asset growth with moderate current income, achieve strong asset growth with nominal income, and achieve maximum asset appreciation. When a choice is made, the next question pops up.
Other questions include comfort with investment performance ranges, age of investor, time horizon of investor, duration of withdrawals from the account, percentage of current income related to the account needs to generate, number of months in cash reserves and the investor’s outlook for the economic climate.
The summary button reveals the questionnaire score, which can range from conservative income to aggressive growth. The allocation button demonstrates circle graphs of the portfolio overview and asset class components.
The portfolio overview shows the client’s existing portfolio and a recommended portfolio based upon the questionnaire. The asset class components show the portfolio and its related index.
The charts section has five tabs and graphs including portfolio growth, asset class growth, holding periods volatility, calendar-year returns and risk/reward. The portfolio growth shows the ending value of $10,000 invested and growing over a five-year period. Asset growth shows the ending value of $10,000 invested broken down by asset classes. Holding period volatility shows the range of returns over a 15-year duration. Calendar-year returns show the year-by-year 15-year growth of the portfolio.
Risk/reward shows the classic Wiesenberger chart plotting out historical risk to reward ratios with the option to select a period from one to 15 years.
The tables section shows the same statistics in numerical form instead of graphic form. Real performance numbers allow the user to custom-build a client portfolio and demonstrate key investment strategies including risk/reward tradeoff and portfolio rebalancing.
To complete the process, the disclosures tab presents a report showing definitions, methodology and basis of the recommendations. The second page ends up being an investment policy statement that can be signed and dated by the client.
Blueprint is linked to the Wiesenberger Investment View database, which tracks over 12,000 mutual funds, 15,000 variable annuity sub-accounts, 2,400 variable life sub-accounts, and 500 closed-end funds to assist in the creation of a diversified portfolio.
The software is simple and straightforward in its presentation, with easy navigation and strong customization features. These include the ability to create an index on the performance charts for comparisons - an NASD compliance feature. Portfolios can be re-balanced on a monthly, quarterly, semiannual or annual basis.
Blueprint allows the financial planner to assess wrap fees, front-end load fees and a portfolio time-period setting.
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