Value Screening and Performance Attribution Using Telemet Orion Investment Platform – Class Room Application Mussie Teclezion Austin E. Cofrin School of Business University of Wisconsin – Green Bay I. Introduction Security analysis and portfolio management are very important skill sets; thus, are part of finance curriculum in business schools. Different investment and portfolio management text books cover the material at different levels of rigor. A practical application of portfolio construction and performance evaluation has become easier with the availability of data from the internet and the development of tools that help investors in selection of securities and performance evaluation of the portfolios. The same tools could be very beneficial in narrowing the gap between the class room coverage of the material and practical application of the portfolio construction and evaluation process. This paper will outline the process that could be very easily applied in a typical principles of investment class. It starts with the selection of securities, executing the trades, and finally evaluating performance using the Multi-Style Attribution analysis of Telemet Orion investment platform. A similar process has been applied in principles of investment course at University of Wisconsin – Green Bay. To implement the process students selected securities using the data available in Telemet Orion platform, executed several trades throughout the semester using StockTrak simulation software and finally evaluated the performance of their portfolio using Multi-Style Attribution analysis capability of Telemet Orion. Different students used different methods of screening to select securities and placed the trades throughout the semester. Students were able to easily upload their transaction history from StockTrak to Telemet Orion so as to conduct attribution analysis. Telemet Orion is an investment platform that combines real-time and historical information, and has extensive utility for investment research and performance evaluation. However, this white paper will focus on some key tools of the platform that could easily be incorporated into a typical investments curriculum. First, Telemet Orion screening tool will be utilized to select securities that qualify several criteria. Second, the portfolio of equities will be analyzed by utilizing the Multi-Style Attribution analysis of Telemet Orion. II. Value Investing and Equity Screening Finding screening criteria for selecting equities that will outperform a benchmark is an endeavor that many investors are willing to take. The investment practice is full of different screening criteria that attempt to filter winner securities, out of the universe of publicly traded securities, for a particular horizon. There are several services available to
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Value Screening and Performance Attribution Using Telemet Orion Investment
Platform – Class Room Application
Mussie Teclezion
Austin E. Cofrin School of Business
University of Wisconsin – Green Bay
I. Introduction
Security analysis and portfolio management are very important skill sets; thus, are part of
finance curriculum in business schools. Different investment and portfolio management
text books cover the material at different levels of rigor. A practical application of
portfolio construction and performance evaluation has become easier with the availability
of data from the internet and the development of tools that help investors in selection of
securities and performance evaluation of the portfolios. The same tools could be very
beneficial in narrowing the gap between the class room coverage of the material and
practical application of the portfolio construction and evaluation process.
This paper will outline the process that could be very easily applied in a typical principles
of investment class. It starts with the selection of securities, executing the trades, and
finally evaluating performance using the Multi-Style Attribution analysis of Telemet
Orion investment platform. A similar process has been applied in principles of
investment course at University of Wisconsin – Green Bay. To implement the process
students selected securities using the data available in Telemet Orion platform, executed
several trades throughout the semester using StockTrak simulation software and finally
evaluated the performance of their portfolio using Multi-Style Attribution analysis
capability of Telemet Orion. Different students used different methods of screening to
select securities and placed the trades throughout the semester. Students were able to
easily upload their transaction history from StockTrak to Telemet Orion so as to conduct
attribution analysis.
Telemet Orion is an investment platform that combines real-time and historical
information, and has extensive utility for investment research and performance
evaluation. However, this white paper will focus on some key tools of the platform that
could easily be incorporated into a typical investments curriculum. First, Telemet Orion
screening tool will be utilized to select securities that qualify several criteria. Second, the
portfolio of equities will be analyzed by utilizing the Multi-Style Attribution analysis of
Telemet Orion.
II. Value Investing and Equity Screening
Finding screening criteria for selecting equities that will outperform a benchmark is an
endeavor that many investors are willing to take. The investment practice is full of
different screening criteria that attempt to filter winner securities, out of the universe of
publicly traded securities, for a particular horizon. There are several services available to
investors that help them screen equities based on fundamental and technical metrics. For
example, the American Association of Individual Investors (AAII) provides list of stocks
that pass different screens representing more than 60 investment strategies
(http://www.aaii.com/stock-screens). Schadler and Cotton (2008) have examined the
effectiveness of AAII stock screens and report 32% of the screens significantly
outperformed the S&P 500 when transaction costs were taken into account.
Among many popular screening criteria is the one developed by Graham and Rea (Rea,
1977; Oppenheimer, 1984). Known as a father of security analysis whose screening
criteria have been widely used, Benjamin Graham authored two widely used books:
“Security Analysis” with David Dodd, and “The Intelligent Investor.” Graham outlined
certain criteria for screening value equities. The criteria are as follows:
(1) An earnings-to-price yield at least twice the AAA bond yield.
(2) A price-earnings ratio less than 40 per cent of the highest price-earnings ratio the
stock had over the past five years.
(3) A dividend yield of at least two-thirds the AAA bond yield.
(4) Stock price below two-thirds of tangible book value per share.
(5) Stock price below two-thirds "net current asset value."
(6) Total debt less than book value.
(7) Current ratio greater than two.
(8) Total debt less than twice "net current asset value."
(9) Earnings growth of prior 10 years at least at a 7 per cent annual (compound) rate.
(10) Stability of growth of earnings in that no more than two declines of 5 per cent or
more in year-end earnings in the prior 10 years are permissible.
According Graham and Rea (Oppenheimer, 1984), the first five criteria are measures of
return or reward, while the second five criteria are measures of risk. Depending on
different investment phases, finding several equities that pass all 10 criteria may be very
difficult; therefore, investors could use different combinations of the criteria.
Oppenheimer (1984) test several combinations of the criteria on NYSE-AMEX universe
of securities of firms, over the years 1974 through 1981. They find positive excess return
from portfolio created using Graham’s selection criteria. Kerch and Maritz (1997) find
positive abnormal return when applying Graham’s selection criteria to industrial shares
traded on Johannesburg Stock Exchange.
In this paper, we construct a portfolio using a subset of Graham’s criteria and evaluate its
performance using the Multi-Style Attribution analysis of Telemet Orion. In addition,
more in-depth financial analysis could be undertaken on the securities that pass through
the screening criteria. However, Graham recognized that financial mistakes could be
mitigated by holding diversified portfolio. Thus, we hold a bit more than 30 stocks in the
portfolio.
Different screening methods carry different risk-reward combination; therefore, there are
benefits to be derived from having screening capability in an investor’s arsenal. First,
they are great ways of narrowing down universe of equities into investable pools based