The Portfolio Management Rating of an ETF or a fund is based on the aggregated stock ratings of the securities it holds as well as its overall Asset Allocation rating, which is defined here.  The Portoflio Management Ratings and the Total Annual Costs ratings combine to determine our Predictive Fund Ratings.

New Con­structs’ stock rat­ings are reg­u­larly fea­tured as among the best by Barron’s over the past three years.

Figure 1 displays the criteria and thresholds that go into the Portfolio Management Rating of every ETF, mutual fund or portfolio we cover. Note that the Portfolio Management Rating is the same as a stock rating except that it incorporates our rating on the fund’s Asset Allocation.

Figure 1: Portfolio Management Rating Table

Sources: New Constructs, LLC

New Constructs’ ratings on the stocks held by funds are aggregated according to the allocation the fund makes to each stock. The aggregated ratings of the holdings translate into the Portfolio Management rating of the ETF, mutual fund or other portfolio. Details on New Constructs’ stock rating system are here. Below is a summary of the criteria that drive the Portfolio Management rating.

We assign rat­ings to every stock under cov­er­age accord­ing to what we believe are the 5 most impor­tant cri­te­ria for assess­ing the risk ver­sus reward of stocks. Those cri­te­ria are divided into two cat­e­gories: “Busi­ness Strength” and “Valuation”.

1)  Business Strength: the quality of the economic earnings of the company and the strength of its business model based its ROIC.

a)     Quality of Earnings measures how reported accounting income compares to the economic earnings of the stocks in the fund.

b)     Return on Invested Capital (ROIC) measures the aggregate cash on cash returns of all stocks in the fund.

2)  Valuation: based on the expectations embedded in stock prices. Investors should buy stocks/funds with low expectations.

a)     Free Cash Flow Yield measures the true cash yield of the companies held by the fund.

b)     Price to Economic Book Value measures the growth expectations embedded in the prices of the stocks in the fund.

c)     Market-Implied Duration of Growth (Growth Appreciation Period) measures the number of years of future profit growth required to justify the current valuation of the stocks in the fund.

3)  Asset Allocation: The Asset Allo­ca­tion Rat­ing informs investors of each fund’s level of allo­ca­tion to cash (non-equities) as well as how that level com­pares to other equity funds. We assume investors in equity funds pre­fer those funds to be max­i­mally invested in equi­ties given that investors can much more cheaply invest in cash on their own. We do not believe that most investors want to pay the fees asso­ci­ated with equity funds to invest in cash.

a)     Cash Allocation measures the percent of the fund’s assets allocated to cash.

    7 replies to "Portfolio Management Rating: Methodology for Predictive Fund Ratings"

    • Harold.R.Soutier Sr

      David, if your going to write something, then present it so those whom read whatever site-Ex Marketwatch, may receive your message clear and to the point-Ex industry Utilities, then stocks specific, even if it puts you subject to rebuttal. Keep up the good work!

    • David Trainer

      Mr. Soutier:
      I am not sure I understand your point – are you looking for more explanation of methodology in my Best & Worst Funds articles?

    • […] its holdings than its costs. Figure 2 shows the ETFs within each style with the worst holdings or portfolio management ratings. The styles are listed in descending order by overall rating as detailed in my 4Q Style Rankings […]

    • Carol Martin

      I find your blog very compelling. Theoretically, using your methods could a large retirement Fund such as a state teachers retirement fund also be rated on its holdings, active management, etc.?

      Thank you

    • David Trainer

      Ms. Martin,
      Yes. We perform portfolio reviews for many of our clients.
      Our analysis can be applied to any group of stocks.

    • Daniel Flath

      Have you done any backtesting to see how this methodology has translated into excess returns or alpha? Apologies in advance if I missed this somewhere else on the site. Thanks.

    • Sam McBride

      We have not been able to do a full backtest of our methodology for all the stocks under our coverage, but you can see the long-term outperformance of our model portfolios here.

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