An Investor’s Guide to Analyzing Your Portfolio

Institutional Investors often must wear two hats. On one hand, they go through great lengths to find uniquely talented managers, and they evaluate them based on their track records and (hopefully) skill-sets. On the other hand, they must think carefully about how a collection of investments coalesce into their aggregate portfolio. What may be a great manager on its own merit may not fit stylistically into a portfolio due to a desire for diversification or a thematic preference. This point is especially important within active and alternative investments – which are meant to deliver alpha or diversification. This asset class can fall prey to groupthink and collective risk.

We’ve dissected this issue in prior blog posts about the need to carefully monitor active portfolio exposures, as well as the risks in aggregate trends such as crowding. In this piece, I will unpack an analysis we call the Portfolio Lookthrough and explain why it’s an important tool for investors in evaluating their aggregate portfolio dynamics.

What Is Portfolio Lookthrough?

Portfolio Lookthrough is a pretty simple concept that requires complex data management and analytical capability. Take your individual managers on a capital weighted basis, and derive a synthetic “lookthrough” portfolio comprised of the best position-level transparency afforded: private positions when available and publicly filed positions when not. Given that public transparency is most accurate at quarter-end (13-F), we produce these analyses quarterly to ensure accurate snapshots of security-level holdings. Here’s an example of a public-data lookthrough derived from a set of famous hedge funds, where we demonstrate capital allocation over time:

With this data input into our alpha platform, we can begin analyzing the lookthrough portfolio (comprised of each manager’s weighted underlying holdings) the way our hedge fund clients analyze their very own portfolios. You can easily answer questions such as “how much Valeant do I own?” and which of your managers are long (or short) the name. How exposed am I to momentum factors and where is that exposure coming from? Concepts such as position concentration, crowding, and position overlap can be easily understood across each dimension of the entire portfolio:

The same goes for slicing and dicing the portfolio, such as this view of the least liquid small and micro-cap names held in the portfolio:

Sector over weights and underweights can be dissected at the manager level:

As can alpha provided by manager:

Style factor contribution can also be understood for the aggregate portfolio:

As can lookthrough position-sizing efficacy:

What this allows the institutional investor to do, ultimately, is to think about her core of investments not only on their own merits, but as a collective portfolio. It is a powerful tool in teasing out crowding, individual skill-sets, and any portfolio characteristic. Otherwise, investors are left reacting to market events that unknowingly whipsaw their portfolios; especially in periods of stress. Instead of piecing together what holistically happened through individual manager dialogues, portfolio lookthroughs help institutional investors proactively understand and manage their books.

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