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Clear Thoughts
How Rankings Correlate to Weightings
| There are different methods to rank and weight stocks, and Clear does this in a way to outperform the benchmark. |
Not exactly a hot topic, especially if you need to stay awake, but for us at Clear Asset Management, it is the kind of computer-generated, alpha seeking discussion that can keep us going all day and night.
First allow us to define these terms in the context of our world. Rankings are the order of our investments each day in each portfolio, depending upon how the stock scored based upon the evaluation of financial data by our computer algorithms. Weightings are how much of each stock we hold in each portfolio represented in terms of the dollar value and percentage of the portfolio.
For example, in our Large Cap Growth Portfolio we own 20 stocks. If each of the stocks had the same computer algorithm generated score, they would all be equally weighted in the portfolio. The dollar value of each stock holding would equate to 5%, or 1/20 of the total value of the entire portfolio and each investment would also be equally ranked. Since the computer generated scores differ for each stock, the weighting percentages vary and the investments are each ranked accordingly.
There are basically two schools of thought on how to rank and weight: (1) rank by a certain criteria and then weight based on the same criteria, or (2) rank the stock and equal weight them, basically to take into account some of the randomness of the markets.
S&P 500 funds consistently have this debate. Most of these funds are weighted as the S&P weights, largest cap stock to lowest of the 500 stocks. The last few years, many lower cap stocks have outperformed their larger S&P brethren. On account of that performance, a new crop of S&P 500 funds have popped up chasing this performance. These funds still are identified as S&P 500 funds but are equal weighted portfolios. To date, many have outperformed the funds pegged to the original method. Of course, if larger caps become more in favor, the converse would then become true.
Our take on this is simple. Our stocks are not selected by some random measure the way these S&P 500 funds are, which is by market cap or equal weight; ours are rigorously screened and then ranked. Based on these rankings, we uncover which stocks are most likely to perform well within a given style, such as large cap growth. This is why we have concentrated portfolios with no more than 20 stocks for large and mid caps, and 25 stocks for small caps.
Taking our decision one step further, if the top stocks (20-25) will outperform the style group, then the higher ranked stocks in Clear portfolios, have a greater weighting than the lower ranked, thus creating a second overlay of leverage based on final computer algorithm determined scores.
Translated into clear simple English, we only own the top ranked stocks, and we own more of the number one ranked stock than the number 20 ranked stock. This gives us the greatest probability of outperforming the benchmarks, and as true believers in our investment philosophy, we point to the live money results which can be found on the left side of the Your Stocks page as proof.
Please feel free to forward any questions to customerservice@clearam.com. |
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