Using accounting data based indexing to create a portfolio of assets

• US 20070055598A1
• Filed: 08/24/2006
• Published: 03/08/2007
• Est. Priority Date: 06/03/2002
• Status: Active Grant

• Current Assignee: Research Affiliates LLC (Research Affiliates Global Holdings LLC)
• Original Assignee: Research Affiliates LLC (Research Affiliates Global Holdings LLC)
• Inventors: Arnott, Robert, Wood, Paul
• Granted Patent: US 7,747,502 B2
• Time in Patent Office: Days
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/12 Accounting

Abstract

A system, method and computer program product creates an index based on accounting based data, as well as a portfolio of financial objects based on the index where the portfolio is weighted according to accounting based data. A passive investment system may be based on indices created from various metrics. The indexes may be built with metrics other than market capitalization weighting, price weighting or equal weighting. Non-financial metrics may also be used to build indexes to create passive investment systems. Additionally, a combination of financial non-market capitalization metrics may be used along with non-financial metrics to create passive investment systems. Once the index is built, it may be used as a basis to purchase securities for a portfolio. Specifically excluded are widely-used capitalization-weighted indexes and price-weighted indexes, in which the price of a security contributes in a substantial way to the calculation of the weight of that security in the index or the portfolio, and equal weighting weighted indexes. Valuation indifferent indexes avoid overexposure to overvalued securities and underexposure to undervalued securities, as compared with conventional capitalization-weighted and price-weighted.

Claims

1. A method of constructing a portfolio of financial objects, comprising:

purchasing a portfolio of a plurality of mimicking financial objects to obtain and/or create a mimicking portfolio, wherein performance of said portfolio of mimicking financial objects substantially mirrors the performance of an accounting data based index based portfolio without substantially replicating said accounting data based index based portfolio.

2. The method of claim 1, further comprising:

obtaining and/or using a risk model for said portfolio of mimicking financial objects, wherein said risk model mirrors a risk model of said accounting data based index.

3. The method of claim 1, wherein said performance of said portfolio of mimicking financial objects substantially mirrors the performance of said accounting data based index based portfolio without substantially replicating financial objects and/or weightings in said accounting data based index based portfolio.

4. The method of claim 1, wherein said financial object comprises:

at least one unit of interest in at least one of;

an asset;

a liability;

a tracking portfolio;

a financial instrument and/or a security, wherein said financial instrument and/or said security denotes a debt, an equity interest, and/or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, and/or any other transaction relating to a fluctuation of an underlying asset, notwithstanding the prevailing value of the contract, and notwithstanding whether such contract, for purposes of accounting, is considered an asset or liability;

a fund; and

/or

an investment entity or account of any kind, including an interest in, or rights relating to;

a hedge fund, an exchange traded fund (ETF), a fund of funds, a mutual fund, a closed end fund, an investment vehicle, and/or any other pooled and/or separately managed investments.

40. The method of claim 2, wherein said risk model is substantially similar to the Fama-French factors, wherein said Fama-French factors comprise at least one of size effect, value effect, and/or momentum effect.

5. A method of constructing a portfolio of financial objects, comprising:

purchasing a plurality of financial objects according to weightings substantially similar to the weightings of an accounting data based index, wherein performance of said plurality of financial objects substantially mirrors the performance of said accounting data based index without using substantially the same financial objects in said accounting data based index.

6. The method of claim 5, wherein said financial object comprises:

at least one unit of interest in at least one of;

an asset;

a liability;

a tracking portfolio;

a financial instrument and/or a security, wherein said financial instrument and/or said security denotes a debt, an equity interest, and/or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, and/or any other transaction relating to a fluctuation of an underlying asset, notwithstanding the prevailing value of the contract, and notwithstanding whether such contract, for purposes of accounting, is considered an asset or liability;

a fund; and

/or

an investment entity or account of any kind, including an interest in, or rights relating to;

a hedge fund, an exchange traded fund (ETF), a fund of funds, a mutual fund, a closed end fund, an investment vehicle, and/or any other pooled and/or separately managed investments.

7. A method of constructing a portfolio of financial objects, comprising:

determining overlapping financial objects appearing in both an accounting data based index (ADBI) and a conventional weighted index,

wherein said conventionally weighted index comprises an index weighted based on at least one of capitalization, equal weighting, and/or share price weighting, and

wherein said ADBI comprises weighting based on at least one accounting data based factor and not based on any of capitalization, equal weighting, and/or share price weighting index;

comparing weightings of said overlapping financial objects in said ADBI with weightings of said overlapping financial objects in said conventionally weighted index; and

purchasing at least one financial object based on said comparing.

8. The method of claim 7, wherein said purchasing comprises at least one of:

purchasing a long position in at least one overlapping financial object when said comparing indicates said at least one overlapping financial object is over weighted in said non-capitalization weighted index relative to said conventional index; and

/or

purchasing a short position in at least one overlapping financial object when said comparing indicates said at least one overlapping financial object is underweighted in said non-capitalization weighted index relative to said conventional index.

9. The method of claim 8, wherein said purchasing of said long and/or short positions is implemented by using total return swaps.

10. The method of claim 8, wherein said long and/or short positions are held for one year.

11. The method of claim 8, further comprising rebalancing the portfolio.

12. The method of claim 11, wherein rebalancing comprises:

at least one of creating new long and/or short positions using cash flow from new capital contributions, and/or altering existing long and/or short positions using cash flow from new capital contributions.

13. The method of claim 7, further comprising using leverage to obtain said long and/or short positions.

14. The method of claim 7, wherein said comparing comprises:

calculating a difference between said weightings.

15. The method of claim 7, wherein said comparing comprises:

calculating a difference between arithmetically modified values of said weightings.

16. The method of claim 15, wherein said arithmetically modified values of said weightings comprises square roots of said weightings.

17. The method of claim 7, wherein said comparing comprises:

calculating a difference based on tiers of weightings using stratified sampling.

18. The method of claim 7, wherein said financial object comprises:

at least one unit of interest in at least one of;

an asset;

a liability;

a tracking portfolio;

a financial instrument and/or a security, wherein said financial instrument and/or said security denotes a debt, an equity interest, and/or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, and/or any other transaction relating to a fluctuation of an underlying asset, notwithstanding the prevailing value of the contract, and notwithstanding whether such contract, for purposes of accounting, is considered an asset or liability;

a fund; and

/or

an investment entity or account of any kind, including an interest in, or rights relating to;

a hedge fund, an exchange traded fund (ETF), a fund of funds, a mutual fund, closed end fund, an investment vehicle, and/or any other pooled and/or separately managed investments.

19. A method of constructing a portfolio of financial objects, comprising:

determining non-overlapping financial objects appearing in only one of either an accounting data based index (ADBI) or a conventional weighted index by comparing financial objects in an ADBI with financial objects in a conventionally weighted index,

wherein said conventionally weighted index comprises conventionally weighting based on at least one of capitalization, equal weighting, and/or share price weighting, and

wherein said ADBI comprises accounting data based weighting on at least one accounting data based factor and not based on any of capitalization, equal weighting, and/or share price weighting index;

weighting said non-overlapping financial objects appearing only in said ADBI by accounting data based weighting;

weighting said non-overlapping financial objects appearing only in said conventionally weighted index by said conventional weighting; and

purchasing financial objects based on said weightings.

20. The method according to claim 19, wherein said accounting data based weighting comprises:

(a) gathering data about a plurality of financial objects;

(b) selecting a plurality of financial objects to create an index of financial objects; and

(c) weighting each of said plurality of financial objects selected in the index based on an objective measure of scale based on accounting data of a company associated with each of said plurality of financial objects,

wherein said weighting comprises;

(i) weighting at least one of said plurality of financial objects based on accounting data; and

(ii) weighting other than weighting based on at least one of market capitalization, equal weighting, and/or share price weighting.

21. The method according to claim 20, wherein said (c) comprises weighting each of said plurality of financial objects, wherein said each of said financial objects comprises:

at least one unit of interest in at least one of;

an asset;

a liability;

a tracking portfolio;

a financial instrument and/or a security, wherein said financial instrument and/or said security denotes a debt, an equity interest, and/or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, and/or any other transaction relating to a fluctuation of an underlying asset, notwithstanding the prevailing value of the contract, and notwithstanding whether such contract, for purposes of accounting, is considered an asset or liability;

a fund; and

/or

an investment entity or account of any kind, including an interest in, or rights relating to;

a hedge fund, an exchange traded fund (ETF), a fund of funds, a mutual fund, closed end fund, an investment vehicle, and/or any other pooled and/or separately managed investments.

22. The method according to claim 20, wherein said (c) comprises weighting each of said plurality of financial objects, wherein said each of said financial objects comprises a stock.

23. The method according to claim 20, wherein said objective measures of scale comprise weighting based on any dividends, book value, cash flow, and/or revenue.

24. The method of claim 23, further comprising equally weighting each objective measure of scale.

25. The method of claim 20, wherein (c) comprises weighting based on said objective measure of scale, wherein said objective measure of scale comprises a measure of company size associated with each of said plurality of financial objects.

26. The method of claim 25, wherein said measure of company size comprises at least one of:

inventory,

revenue,

sales,

income,

book income,

taxable income,

earnings growth rate,

earnings before interest and tax (EBIT),

earnings before interest, taxes, depreciation and amortization (EBITDA),

retainer earnings,

number of employees,

capital expenditures,

salaries,

book value,

assets,

fixed assets,

current assets,

quality of assets,

operating assets,

intangible assets,

dividends,

gross dividends,

dividend yields,

cash flow,

liabilities,

losses,

long term liabilities,

short term liabilities,

liquidity,

long term debt,

short term debt,

bonds,

corporate bonds,

net worth,

shareholder equity,

goodwill,

research and development expenditures,

costs,

cost of goods sold (COGS), and/or

research and development costs.

27. The method of claim 19, wherein said financial object comprises:

at least one unit of interest in at least one of;

an asset;

a liability;

a tracking portfolio;

a financial instrument and/or a security, wherein said financial instrument and/or said security denotes a debt, an equity interest, and/or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, and/or any other transaction relating to a fluctuation of an underlying asset, notwithstanding the prevailing value of the contract, and notwithstanding whether such contract, for purposes of accounting, is considered an asset or liability;

a fund; and

/or

an investment entity or account of any kind, including an interest in, or rights relating to;

a hedge fund, an exchange traded fund (ETF), a fund of funds, a mutual fund, a closed end fund, an investment vehicle, and/or any other pooled and/or separately managed investments.

39. The method of claim 25, wherein said measure of company size comprises at least one of:

a financial ratio of a company;

a ratio of accounting based data;

a ratio of accounting based data per share;

a ratio of a first accounting based data to a second accounting based data;

a liquidity ratio;

a working capital ratio;

a current ratio;

a quick ratio;

a cash ratio;

an asset turnover ratio;

a receivables turnover ratio;

an average collection period ratio;

an average collection period ratio;

an inventory turnover ratio;

an inventory period ratio;

a leverage ratio;

a debt ratio;

a debt-to-equity ratio;

an interest coverage ratio;

a profitability ratio;

a return on common equity (ROCE) ratio;

profit margin ratio;

an earnings per share (EPS) ratio;

a gross profit margin ratio;

a return on assets ratio;

a return on equity ratio;

a dividend policy ratio;

a dividend yield ratio;

a payout ratio;

a capital market analysis ratio;

a price to earnings (PE) ratio; and

/or

a market to book ratio.

28. A method, executed on a data processing system, comprising:

creating an accounting data based index (ADBI) based on accounting data including;

selecting a universe of financial objects, and

selecting a subset of said universe based on said accounting data to obtain the ADBI;

creating a portfolio of financial objects using said ADBI, including weighting the financial objects in said portfolio according to a measure of value of a company associated with each financial object in said portfolio.

29. The method according to claim 28, wherein said universe comprises at least one of:

a sector;

a market;

a market sector;

an industry sector;

a geographic sector;

an international sector;

a sub-industry sector;

a government issue; and

/or

a tax exempt financial object.

30. The method according to claim 28, wherein said accounting based data used in weighting as a measure of value of the company associated with the financial object, comprises at least one of:

any dividends;

revenue;

cash flow; and

/or

book value.

31. The method according to claim 30, wherein said accounting based data are weighted relatively dependent on the geography of the company associated with the financial object.

32. The method of claim 28, wherein said financial object comprises:

at least one unit of interest in at least one of;

an asset;

a liability;

a tracking portfolio;

a financial instrument and/or a security, wherein said financial instrument and/or said security denotes a debt, an equity interest, and/or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, and/or any other transaction relating to a fluctuation of an underlying asset, notwithstanding the prevailing value of the contract, and notwithstanding whether such contract, for purposes of accounting, is considered an asset or liability;

a fund; and

/or

an investment entity or account of any kind, including an interest in, or rights relating to;

a hedge fund, an exchange traded fund (ETF), a fund of funds, a mutual fund, a closed end fund, an investment vehicle, and/or any other pooled and/or separately managed investments.

33. A computer-implemented method for construction and management of an index and at least one index fund containing a portfolio of financial objects based on the index, wherein weighting of the index is based on accounting based data rather than on stock prices or market capitalization or equal weighting, the computer-implemented method comprising:

creating an index, and at least one index fund containing a portfolio of financial objects, wherein the constituent weightings of the companies issuing the financial objects in the index fund are based upon accounting based data regarding the companies associated with the financial objects, wherein the accounting based data comprises any dividends, cash flow, revenues, and/or book value.

34. The computer-implemented method of claim 33, wherein the computer implemented method comprises:

creating said index, and said at least one index fund containing a portfolio of financial objects where the constituent weightings are based upon any ratio of accounting based data, or any manipulation of accounting based data, that is contained within a standard company annual report and accounts.

35. The computer-implemented method of claim 33, wherein the computer implemented method comprises:

creating said index, and said at least one index fund containing a portfolio of financial objects wherein the constituent weightings are based upon any ratio of accounting based data per share, or any manipulation of accounting based data, that is contained within a standard company annual report and accounts.

36. The computer implemented method of claim 33, wherein the computer implemented method comprises:

managing an accounting based data index, and at least one index fund containing a portfolio of financial objects based on the index including;

altering the relative weightings of the financial objects within the at least one index fund as the accounting based data concerning the companies associated with the financial objects changes.

37. The computer implemented method of claim 36, wherein the altering comprises at least one of:

altering based on at least one of;

changes in relative weightings of financial objects in the index; and

/or changes in the financial objects that are members of the index outside the sample changes; and

/or

altering at the time of at least one of when, and/or after at least one company associated with a financial object of the index reports its accounting information.

38. The computer-implemented method of claim 33, wherein said financial object comprises:

at least one unit of interest in at least one of;

an asset;

a liability;

a tracking portfolio;

a financial instrument and/or a security, wherein said financial instrument and/or said security denotes a debt, an equity interest, and/or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, and/or any other transaction relating to a fluctuation of an underlying asset, notwithstanding the prevailing value of the contract, and notwithstanding whether such contract, for purposes of accounting, is considered an asset or liability;

a fund; and

/or

an investment entity of any kind, including an interest in, or rights relating to;

a hedge fund, an exchange traded fund (ETF), a fund of funds, a mutual fund, an investment vehicle, and/or any other pooled and/or separately managed investments.