Load aware optimization

• US 7,249,081 B2
• Filed: 02/23/2001
• Issued: 07/24/2007
• Est. Priority Date: 02/23/2000
• Status: Expired due to Term

• Current Assignee: Edelman Financial Engines LLC
• Original Assignee: Financial Engines Incorporated (Edelman Financial Engines LLC)
• Inventors: Watson, John G., Shearer, James W., Scott, Jason S.
• Primary Examiner(s): Nguyen; Nga
• Application Number:
  US09/792,258
• Publication Number:
  US 20020002521A1
• Time in Patent Office: 2,342 Days
• Field of Search: 705/35, 705/36, 705/37
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 10/04 Forecasting or optimisation specially adapted for administrative or management purposes, e.g. linear programming or "cutting stock problem" market predictions or forecasting for commercial activities G06Q30/0202
• 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 40/10 Tax strategies

Abstract

A process utilizing a modification to the inputs to a standard portfolio optimization is provided for facilitating load aware optimizations. First, each loaded financial product, such as a mutual fund having a front end or back end load, of a set of available financial products is modeled as a loaded portion and an unloaded portion by determining an adjusted return. The adjusted return is based on a period the load bearing financial product is projected to be held in a portfolio and the amount of the load. A variable relating the fraction of a loaded financial product in the portfolio may be decomposed into two variables (one representing the loaded portion and another representing the unloaded portion) to regain the quadratic programming problem. The optimization may then be performed using quadratic programming techniques, and the fraction of each loaded financial product in the portfolio is calculated by combining the two variables.

Claims

1. A method of selecting a recommended portfolio of one or more financial products of a set of financial products, the method comprising:

determining an adjusted return for each load-bearing financial product of the set of financial products based on a predetermined holding period, current holdings in the load-bearing financial product, information regarding expected future contributions to or withdrawals from the load-bearing financial product during the predetermined holding period, an expected return of the load-bearing financial product, and the amount of load associated with the load-bearing financial product; and

generating the recommended portfolio of one or more financial products from the set of financial products in varying proportions based upon the adjusted return of each load-bearing financial product and an expected return of each non-load-bearing financial product of the set of financial products.

2. The method of claim 1, wherein one or more levels of risk may be specified by a user, indicating the user'"'"'s risk tolerance, and wherein said generating the recommended portfolio is additionally based on the user'"'"'s risk tolerance.

3. The method of claim 1, wherein said generating the recommended portfolio is additionally based upon a covariance of returns relating to the set of financial products.

4. The method of claim 3, wherein said generating the recommended portfolio includes using quadratic programming techniques to determine proportions of load-bearing and non-load-bearing financial products that maximize expected value of utility from the recommended portfolio, where the utility function is adequately approximated by a linear combination of the recommended portfolio'"'"'s expected return and variance of return.

5. The method of claim 2, wherein the one or more levels of risk correspond to measures of volatility in a financial product'"'"'s monetary value in response to changes in market conditions or a portfolio'"'"'s monetary value in response to changes in market conditions.

6. A method of reallocating a portfolio of one or more financial products, the method comprising:

determining whether the portfolio includes a loaded financial product;

decomposing a fraction relating to a relative amount of the loaded financial product currently held in the portfolio into three terms, a first term being a known value representing a portion of the loaded financial product that is currently held in the portfolio, a second term being a variable representing a portion of the loaded financial product that may be sold in order to generate a recommended portfolio from the portfolio, and a third term being a variable representing a portion of the loaded financial product that may be purchased in order to generate the recommended portfolio from the portfolio and from a set of available financial products;

determining an adjusted return for each loaded financial product of the set of available financial products and each loaded financial product contained within the portfolio based on a predetermined period of time, an expected return of each loaded financial product, and an amount of load associated with each loaded financial product; and

generating the recommended portfolio of one or more financial products from the available set of financial products and from one or more financial products in the portfolio based on the predetermined period of time, current holdings in each loaded financial product, information regarding expected future contributions to or withdrawals from each loaded financial product during the predetermined period of time, and an expected return of each financial product that is non-load-bearing.

7. The method of claim 6, wherein a fraction relating to the relative amount of the loaded financial product proposed to be held in the recommended portfolio is decomposed into three terms, a first term being a known portion of the loaded financial product that is a specified lower/upper bound fraction representing a minimum/maximum portion of the loaded financial product that is recommended to be obtained in the recommended portfolio, a second term being a variable representing a portion of the loaded financial product that is above/below the lower/upper bound and is immune to an initial load fee, and a third term being a variable representing a portion of the loaded financial product that is above/below the lower/upper bound and is subject to an initial load fee.

8. The method of claim 7, wherein the first term associated with the recommended portfolio is based upon a user specified minimum or maximum allowed portion of the loaded financial product.

9. The method of claim 6, wherein said generating the recommended portfolio includes using quadratic programming techniques to determine proportions of load-bearing and non-load-bearing financial products that maximize expected value of utility from the portfolio, where the utility function is adequately approximated by a linear combination of the portfolio'"'"'s expected return and variance of return.

10. The method of claim 9, wherein said generating the recommended portfolio is additionally based upon a covariance of returns relating to the set of available financial products.

11. The method of claim 9, wherein one or more levels of risk may be specified by a user, indicating the user'"'"'s risk tolerance, and wherein said generating the recommended portfolio is additionally based on the user'"'"'s risk tolerance.

12. A method of reallocating a portfolio of one or more financial products, the method comprising:

modeling each loaded financial product of the one or more financial products in terms of at least a loaded portion and an unloaded portion;

calculating an adjusted return for each loaded financial product via the modeling and based on an expected return of each loaded financial, a predetermined holding period, current holdings in each loaded financial product, information regarding expected future contributions to or withdrawals from each loaded financial product during the predetermined holding period, and a load fee associated with each loaded financial product; and

generating a reallocated portfolio based upon the adjusted return of each loaded financial product and expected returns of each unloaded financial product of the one or more financial products.

13. A method of financial product selection comprising:

calculating a plurality of adjusted returns by calculating an adjusted return for each of a plurality of loaded financial products of a set of financial products available to a particular investor for investment, the plurality of adjusted returns representing expected performance of the plurality of loaded financial products as a result of a corresponding load applied to each of the plurality of loaded financial products;

modeling each of the plurality of loaded financial products in the set of financial products available to the particular investor for investment in terms of at least a loaded portion and an unloaded portion, the loaded portion'"'"'s performance described in terms of an associated adjusted return of the plurality of adjusted returns, and the unloaded portion'"'"'s performance described in terms of an associated expected return of a plurality of expected returns of the plurality of loaded financial products; and

generating one or more portfolios of financial products from the set of financial products in varying proportions based upon expected returns of non-loaded financial products of the set of financial products, the adjusted returns of the plurality of loaded financial products, and the modeling.

14. The method of claim 13, wherein one or more levels of risk may be specified by the particular investor, indicating the particular investor'"'"'s risk tolerance, and wherein said generating one or more portfolios is additionally based on the particular investor'"'"'s risk tolerance.

15. The method of claim 14, wherein said generating one or more portfolios of financial products further comprises using quadratic programming techniques to determine combinations of financial products of the set of financial products, loaded portions of loaded financial products in the recommended portfolio, and unloaded portions of the loaded financial products in the recommended portfolio in varying proportions that have a highest expected return for a given level of risk.

16. The method of claim 13, wherein said generating one or more portfolios of financial products is additionally based upon covariance information relating to the set of financial products.

17. The method of claim 13, wherein said modeling each of the plurality of loaded financial products further includes representing at least one of the loaded financial products in the set of financial products available to the particular investor for investment as a sum of three terms, one of which indicates a minimum or maximum portion that each of the loaded financial products in the set of financial products available to the particular investor for investment should contribute to the one or more portfolios of financial products.

18. A machine-readable medium having stored thereon data representing sequences of instructions, which when executed by a processor, cause the processor to:

determinine an adjusted return for each load-bearing financial product of a set of available financial products based on a predetermined holding period, current holdings in the load-bearing financial product, information regarding expected future contributions to or withdrawals from each load-bearing financial product during the predetermined holding period, an expected return of each load-bearing financial product, and an amount of load associated with the load-bearing financial product; and

generate a recommended portfolio of one or more financial products from the set of financial products in varying proportions based upon the adjusted return of each load-bearing financial product and an expected return of each non-load-bearing financial product of the set of available financial products.

19. A computer system comprising:

a processor; and

a computer readable-medium containing instructions that when executed cause the processor to

calculate a plurality of adjusted returns by calculating an adjusted return for each of a plurality of loaded financial products of a set of financial products available to a particular investor for investment, the plurality of adjusted returns representing expected performance of the plurality of loaded financial products as a result of a corresponding load applied to each of the plurality of loaded financial products;

represent each of the plurality of loaded financial products in the set of financial products available to the particular investor for investment in terms of at least a loaded portion and an unloaded portion, the loaded portion'"'"'s performance described in terms of an associated adjusted return of the plurality of adjusted returns, and the unloaded portion'"'"'s performance described in terms of an associated expected return of a plurality of expected returns of the plurality of loaded financial products; and

generate one or more portfolios of financial products from the set of financial products in varying proportions based upon expected returns of non-loaded financial products of the set of financial products, the plurality of adjusted returns, and the representation of each of the plurality of loaded financial products in terms of at least a loaded portion and an unloaded portion.

20. A method comprising:

determining feasible exposures to a plurality of asset classes achievable by a particular investor by determining a combination of one or more asset classes of the plurality of asset classes and proportions of the one or more asset classes of the plurality of asset classes that characterize future performance of each financial product of a set of financial products available to the particular investor for investment;

determining an adjusted return for each load-bearing financial product of the set of financial products based on a predetermined holding period, current holdings in the load-bearing financial product by the particular investor, information regarding expected future contributions to or withdrawals from the load-bearing financial product during the predetermined holding period, and an expected return of each load-bearing financial product, and an amount of load associated with each load-bearing financial product; and

identifying a recommended efficient portfolio of one or more financial products form the set of financial products by maximizing an expected utility of wealth for the particular investor based upon the feasible exposures, the adjusted return of each load-bearing financial product of the set of financial products, and an expected return of each non-load-bearing financial product of the set of financial products.

21. The method of claim 20, further comprising modeling expected future asset class returns as a function of one or more economic factors by generating return scenarios for each asset class of the plurality of asset classes based upon future scenarios of the one or more economic factors.

22. The method of claim 20, wherein said determining a combination of one or more asset classes of the plurality of asset classes and proportions of the one or more asset classes of the plurality of asset classes that characterize future performance of each financial product of a set of financial products comprises performing returns-based style analysis.

23. The method of claim 20, wherein said determining a combination of one or more asset classes of the plurality of asset classes and proportions of the one or more asset classes of the plurality of asset classes that characterize future performance of each financial product of a set of financial products comprises surveying the underlying assets held in the financial product.

24. The method of claim 20, wherein said determining a combination of one or more asset classes of the plurality of asset classes and proportions of the one or more asset classes of the plurality of asset classes that characterize future performance of each financial product of a set of financial products comprises obtaining exposure information based on a target benchmark associated with each financial product of the set of financial products.

25. The method of claim 20, wherein said determining a combination of one or ore asset classes of the plurality of asset classes and proportions of the one or more asset classes of the plurality of asset classes that characterize future performance of each financial product of the set of financial products comprises categorizing exposures based on standard industry classification schemes.

26. The method of claim 20, further comprising forecasting a probability of the particular investor meeting an identified financial goal based upon the recommended efficient portfolio.

27. The method of claim 20, wherein the set of financial products available to the particular investor for investment comprises financial products offered through an employee-directed defined contribution plan.

28. A method comprising:

identifying a relationship between returns of each financial product of a set of financial products that are available to a particular investor for investment in an account and returns of combinations of one or more factor asset classes of a set of factor asset classes by performing an exposure analysis on each financial product of the set of financial products;

determining expected returns and volatility of returns for each of a plurality of efficient portfolios of one or more of the financial products from the set of financial products based upon the relationship, estimated adjusted returns for each load-bearing financial product of the set of financial products, information regarding expected future cash contributions to or cash withdrawals from the account, and loads associated with each load-bearing financial product; and

identifying a recommended portfolio of the plurality of efficient portfolios by selecting an efficient portfolio of the plurality of efficient portfolios.

29. The method of claim 28, further comprising:

forecasting returns associated with each core asset class of a set of core asset classes by generating core asset class scenarios based upon future scenarios of one or more economic factors with an equilibrium econometric model; and

forecasting returns associated with each factor asset class of the set of factor asset classes by generating factor model asset scenarios based upon the core asset class scenarios.

30. The method of claim 28, wherein said performing an exposure analysis on each financial product of the set of financial products comprises performing returns-based style analysis.

31. The method of claim 28, further comprising forecasting a probability of the particular investor meeting an identified financial goal based upon the recommended portfolio.

32. The method of claim 28, wherein said identifying a recommended portfolio further comprises maximizing an expected utility of wealth for the particular investor.

33. A method of reallocating a portfolio of one or more financial products, the method comprising:

a step for modeling each loaded financial product of the one or more financial products in terms of at least a loaded portion and an unloaded portion;

a step for calculating an adjusted return for each loaded financial product taking into consideration the loaded portion and the unloaded portion and based on an expected return of each loaded financial, a predetermined holding period, current holdings in each loaded financial product, information regarding expected future contributions to or withdrawals from each loaded financial product during the predetermined holding period, and a load fee associated with each loaded financial product; and

a step for generating a reallocated portfolio based upon the adjusted return of each loaded financial product and expected returns of each non-loaded financial product of the one or more financial products.