Using accounting data based indexing to create a portfolio of financial objects

• US 8,589,276 B2
• Filed: 08/23/2011
• Issued: 11/19/2013
• Est. Priority Date: 06/03/2002
• Status: Expired due to Term

• Current Assignee: Research Affiliates LLC (Research Affiliates Global Holdings LLC)
• Original Assignee: Research Affiliates LLC (Research Affiliates Global Holdings LLC)
• Inventors: Arnott, Robert D., Wood, Paul Christopher
• Primary Examiner(s): JOHNSON, GREGORY L
• Application Number:
  US13/216,238
• Publication Number:
  US 20120215717A1
• Time in Patent Office: 819 Days
• Field of Search: None
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

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. An index construction method comprising:

determining, by at least one computer processor, a proportional fundamental index weight for each index constituent financial objects based on at least one objective measure of scale associated with said entities or said financial objects;

wherein said at least one objective measure of scale comprises a financial metric associated with one of said entities or said financial objects other than the market capitalization of said entities or the price of said financial objects;

wherein said financial metric comprises any two or more of;

book value;

sales;

cash flow;

or any dividends; and

managing, by the at least one computer processor, a portfolio of financial objects based on said index of financial objects, wherein said managing comprises at least one of;

adjusting, by the at least one computer processor, the financial objects that comprise said portfolio based on changes to the at least one objective measure of scale used to weight a plurality of financial objects used to construct the index of financial objects;

adjusting, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio based on changes to the at least one objective measure of scale used to weight the plurality of financial objects used to construct the index of financial objects;

rebalancing, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio when the weighting of one or more of said financial objects at least one of;

exceeds a threshold value, or deviates from a target weight;

or

rebalancing relative weightings of the financial objects that comprise said portfolio to minimize turnover of said financial objects.

2. An index construction method comprising:

determining, by at least one computer processor, a proportional fundamental index weight for each index constituent financial objects based on at least one objective measure of scale associated with said entities or said financial objects;

wherein said at least one objective measure of scale comprises a financial metric associated with one of said entities or said financial objects other than the market capitalization of said entities or the price of said financial objects;

wherein said financial metric comprises at least one of;

book value;

sales;

cash flow;

or any dividends; and

weighting, by the at least one computer processor, by a mathematical combination of a plurality of values of said financial metric data for a given financial object of a given entity, said plurality of financial metric data of said given financial object of said given entity, comprising at least one;

a plurality of time periods;

a plurality of years;

a plurality of quarters;

a plurality of months;

or

a plurality of accounting periods; and

wherein said mathematical combination of said plurality of said values of said financial metric data for said given financial object of said given entity, comprises at least one of;

calculating, by the at least one computer processor, a mathematical average of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a mathematical weighted average of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a statistical mean of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a statistical median of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a midpoint of said plurality of financial metric data of said given financial object of said given entity;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a power of said financial metric data;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a fractional power of said financial metric data;

normalizing, by the at least one computer processor, at least one of said plurality of financial metric data;

transforming, by the at least one computer processor, said mathematical combination of said plurality of values of said financial metric data of said given financial object of said given entity;

transforming, by the at least one computer processor, said mathematical combination of said plurality of values of said financial metric data of said given financial object of said given entity, by taking a power of said mathematical combination of said financial metric data;

transforming, by the at least one computer processor, said mathematical combination of said plurality of values of said financial metric data of said given financial object of said given entity, by taking a fractional power of said mathematical combination of said financial metric data;

or

normalizing, by the at least one computer processor, said mathematical combination of said plurality of values of said financial metric data, or a transformed mathematical combination.

3. An index construction method comprising:

receiving a plurality of historical data of a plurality of financial metrics of a plurality of financial objects, said plurality of financial objects comprising publicly traded entities; and

weighting, by at least one computer processor, a plurality of index constituent financial objects, each of said plurality of index constituent financial objects associated with at least one entity, and

determining, by the at least one computer processor, a proportional fundamental index weight for each of said index constituent financial objects based on at least one objective measure of scale associated with said entities or said financial objects;

wherein said at least one objective measure of scale comprises at least one of;

at least one financial metric associated with one of said entities or said financial objects;

at least one demographic measure of one of said entities or said financial objects;

or

at least one metric from information disclosures of a publicly traded entity; and

wherein said at least one objective measure of scale comprises a metric other than the market capitalization of said entities or the price of said financial objects; and

weighting, by the at least one computer processor, by a mathematical combination of a plurality of data for said at least one objective measure of scale of a given financial object of a given entity, said plurality of data for said at least one objective measure of scale of said given financial object of said given entity, comprising at least one;

a plurality of time periods;

a plurality of years;

a plurality of quarters;

a plurality of months;

or

a plurality of accounting periods; and

wherein said mathematical combination of said plurality data for said given financial object of said given entity, comprises at least one of;

calculating, by the at least one computer processor, a mathematical average of said plurality of data for said given financial object of said given entity;

calculating, by the at least one computer processor, a mathematical weighted average of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a statistical mean of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a statistical median of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a midpoint of said plurality of financial metric data of said given financial object of said given entity;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a power of said financial metric data;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a fractional power of said financial metric data;

normalizing, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object, or a transformed financial metric data;

transforming, by the at least one computer processor, said proportional index weight of each of said plurality of index constituent financial objects;

transforming, by the at least one computer processor, said proportional index weight of said given financial object of said given entity, by taking a power of, said proportional index weight of each of said plurality of index constituent financial objects;

transforming, by the at least one computer processor, said proportional index weight of said plurality of index constituent financial objects, by taking a fractional power of said proportional index weight of each of said plurality of index constituent financial objects;

or

normalizing, by the at least one computer processor, said proportional index weight of said plurality of index constituent financial objects, or a transformed proportional index weight of each of said plurality of index constituent financial objects.

4. The computer-implemented method of claim 3, further comprising:

normalizing, by the at least one computer processor, data over a plurality of time periods.

5. The computer-implemented method of claim 3, further comprising:

rebalancing, by the at least one computer processor, said index on a periodic basis.

6. The computer-implemented method of claim 5, wherein said rebalancing said index on a periodic basis comprises at least one of:

rebalancing, by the at least one computer processor, on a yearly basis;

rebalancing, by the at least one computer processor, on a quarterly basis;

rebalancing, by the at least one computer processor, on a half year basis;

or

rebalancing, by the at least one computer processor, on a multiple year basis.

7. The computer-implemented method of claim 3, further comprising:

recalculating, by the at least one computer processor, said index on a periodic basis.

8. The computer-implemented method of claim 7, wherein said recalculating said index on said periodic basis comprises at least one of:

recalculating, by the at least one computer processor, on a yearly basis;

recalculating, by the at least one computer processor, on a quarterly basis;

recalculating, by the at least one computer processor, on a half year basis;

or

recalculating, by the at least one computer processor, on a multiple year basis.

9. The computer-implemented method of claim 3, further comprising:

adjusting, by the at least one computer processor, said index based on changes over time.

10. The computer-implemented method of claim 9, wherein said adjusting said index based on said changes comprises at least one of:

adjusting, by the at least one computer processor, said index upon a change in financial market status of an index constituent;

adjusting, by the at least one computer processor, said index upon an index constituent going bankrupt;

adjusting, by the at least one computer processor, said index upon an index constituent stock split;

adjusting, by the at least one computer processor, said index upon an index constituent modifying at least one class of stock;

adjusting, by the at least one computer processor, said index upon a price shift of an index constituent;

or

adjusting, by the at least one computer processor, said index upon a delisting of an index constituent.

11. The computer-implemented method of claim 3, further comprising:

adjusting, by the at least one computer processor, said index based on missing data.

12. The computer-implemented method of claim 11, wherein said adjusting said index based on missing data comprises:

adjusting, by the at least one computer processor, said index if

a plurality of metrics are being used, and

for a given entity or financial object, at least one of said plurality of metrics is missing.

13. The computer-implemented method of claim 12, wherein said adjusting said index based on missing data comprises:

averaging said remaining plurality of metrics, leaving out said at least one missing metric.

14. An index construction method comprising:

receiving a plurality of historical data of a plurality of financial metrics of a plurality of financial objects, said plurality of financial objects each relating to an entity; and

weighting, by at least one computer processor, a plurality of index constituent financial objects, each of said plurality of index constituent financial objects associated with an entity, and

determining, by the at least one computer processor, a proportional fundamental index weight for each of said index constituent financial objects based on at least one objective measure of scale associated with said entities or said financial objects;

wherein said at least one objective measure of scale comprises at least one of;

at least one financial metric associated with at least one of said entities or said financial objects;

at least one demographic measure of at least one of said entities or said financial objects;

or

at least one metric from information disclosures of a publicly traded entity; and

wherein said at least one objective measure of scale comprises a metric other than the market capitalization of said entities or the price of said financial objects; and

weighting, by the at least one computer processor, by a mathematical combination of a plurality of data for said at least one objective measure of scale of a given financial object of a given entity, said plurality of data for said at least one objective measure of scale of said given financial object of said given entity, comprising at least one of;

a plurality of time periods;

a plurality of years;

a plurality of quarters;

a plurality of months;

or

a plurality of accounting periods; and

wherein said mathematical combination of said plurality data for said given financial object of said given entity, comprises at least one of;

calculating, by the at least one computer processor, a mathematical average of said plurality of data for said given financial object of said given entity;

calculating, by the at least one computer processor, a mathematical weighted average of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a statistical mean of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a statistical median of said plurality of financial metric data of said given financial object of said given entity;

calculating, by the at least one computer processor, a midpoint of said plurality of financial metric data of said given financial object of said given entity;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a power of said financial metric data;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a fractional power of said financial metric data;

normalizing, by the at least one computer processor, at least one of said plurality of financial metric data, or a transformed financial metric data;

transforming, by the at least one computer processor, said proportional fundamental index weight for each of said index constituent financial objects of said given financial object of said given entity;

transforming, by the at least one computer processor, said proportional fundamental index weight for each of said index constituent financial objects of said given entity, by taking a power of said financial metric data;

transforming, by the at least one computer processor, said proportional fundamental index weight for each of said index constituent financial objects of said given financial object of said given entity, by taking a fractional power of said financial metric data;

or

normalizing, by the at least one computer processor, said proportional fundamental index weight for each of said index constituent financial objects, or a transformed proportional fundamental index weight.

15. The computer-implemented method of claim 14, wherein said calculating said mathematical combination comprises reducing risk.

16. The computer-implemented method of claim 14, wherein said objective measure of scale comprises at least one of:

book value;

sales;

revenue;

profit;

earnings;

cash flow;

cash earnings;

or

a fundamental accounting variable.

17. An index construction method comprising:

receiving, by at least one computer processor, fundamental accounting data about a plurality of entities, over a plurality of time periods, each of said entities associated with at least one financial objects;

receiving, by the at least one computer processor, a plurality of index constituents;

weighting, by the at least one computer processor, said plurality of said index constituents according to at least one financial metric of said fundamental accounting data, each of said at least one financial metrics having data for said plurality of time periods from said fundamental accounting data to obtain relative weightings, and wherein said weighting comprises;

averaging, by the at least one computer processor, said fundamental accounting data over said plurality of said time periods for said each of said at least one financial metrics; and

weighting, by the at least one computer processor, said index constituents using at least one economic-centric metric about said entities other than a market-centric metric to obtain an economic-centric index of financial objects,

wherein said at least one economic-centric metric comprises a metric comprising at least one of;

at least one economic size metric;

at least one economic impact metric;

or

at least one economic footprint metric;

providing, by the at least one computer processor, said economic-centric index to a third party, wherein said third party manages, by at least one computer processor, a portfolio of financial objects based on said index of financial objects, wherein said third party manages, comprising at least one of;

adjusts, by at least one computer processor, financial objects that comprise said portfolio based on changes to said one or more financial metrics used to weight the plurality of financial objects used to construct the economy-centric index of financial objects;

adjusts, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio based on changes to the at least one objective measure of scale used to weight the plurality of financial objects used to construct the economy-centric index of financial objects;

adjusts, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio based on the at least one objective measure of scale used to weight the plurality of financial objects used to construct the economy-centric index of financial objects, wherein said adjusts, comprises at least one of;

transforms, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity;

transforms, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a power of said financial metric data;

transforms, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a fractional power of said financial metric data;

normalizes, by the at least one computer processor, at least one of said plurality of financial metric data, or a transformed financial metric data;

transforms, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio of said given financial object of said given entity;

transforms, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio of said given financial object of said given entity, by taking a power of said relative weightings;

transforms, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio of said given financial object of said given entity, by taking a fractional power of said relative weightings;

or

normalizes, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio, or a transformed relative weighting;

rebalances, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio when the weighting of one or more of said financial objects at least one of;

exceeds a threshold value, or deviates from a target weight;

or

rebalances, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio to minimize turnover of said financial objects.

18. The computer-implemented method according to claim 17, wherein said weighting comprises:

weighting based on a plurality of said economic-centric metrics.

19. The computer-implemented method according to claim 18, wherein said weighting based on said plurality of economic-centric metrics comprises:

weighting based on at least one of;

book value;

book value of operating assets;

sales;

revenue;

profit;

earnings;

cash flow;

cash earnings;

cash flow from operations;

or

a fundamental accounting variable.

20. The computer-implemented method according to claim 18, wherein said weighting based on said plurality of economic-centric metrics comprises:

weighting based on metrics comprising;

book value;

sales; and

cash flow.

21. The computer-implemented method according to claim 17, wherein said third party further manages comprising:

rebalances on a periodic time basis;

or

rebalances on a periodic accounting period basis.

22. An index construction method comprising:

receiving, by at least one processor, fundamental accounting data about a plurality of entities, over a plurality of accounting periods, each of said entities associated with at least one financial object;

receiving, by the at least one processor, a plurality of index constituents;

weighting, by the at least one processor, said plurality of said index constituents according to one or more financial metrics of said fundamental accounting data, each of said one or more financial metrics having data for said plurality of accounting periods from said fundamental accounting data to obtain relative weightings, and wherein said weighting comprises;

averaging said fundamental accounting data over said plurality of said accounting periods for said each of said one or more financial metrics; and

weighting said index constituents using at least one economic-centric metric about said entities other than market-centric metric to obtain an economic-centric index of financial objects,

wherein said at least one economic-centric metric comprises a metric comprising at least one of;

at least one economic size metric;

at least one economic impact metric;

or

at least one economic footprint metric;

providing said economic-centric index to a third party, wherein said third party manages, by at least one computer processor, a portfolio of financial objects based on said index of financial objects, wherein said third party manages, comprising at least one of;

adjusts, by at least one computer processor, financial objects that comprise said portfolio based on changes to said one or more financial metrics used to weight the plurality of financial objects used to construct the economy-centric index of financial objects;

adjusts, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio based on changes to the at least one objective measure of scale used to weight the plurality of financial objects used to construct the economy-centric index of financial objects;

adjusts, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio based on the at least one objective measure of scale used to weight the plurality of financial objects used to construct the economy-centric index of financial objects, wherein said adjusts, comprises at least one of;

transforms, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity;

transforms, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a power of said financial metric data;

transforms, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a fractional power of said financial metric data;

normalizes, by the at least one computer processor, at least one of said plurality of financial metric data, or a transformed financial metric data;

transforms, by the at least one computer processor, said relative weightings of the financial objects that comprise said portfolio of said given financial object of said given entity;

transforms, by the at least one computer processor, said relative weightings of the financial objects that comprise said portfolio of said given entity, by taking a power of said relative weightings;

transforms, by the at least one computer processor, said relative weightings of the financial objects that comprise said portfolio of said given financial object of said given entity, by taking a fractional power of said relative weightings;

or

normalizes, by the at least one computer processor, said relative weightings of the financial objects that comprise said portfolio, or a transformed relative weightings;

rebalances, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio when the weighting of one or more of said financial objects at least one of;

exceeds a threshold value, or deviates from a target weight;

or

rebalances, by the at least one computer processor, relative weightings of the financial objects that comprise said portfolio to minimize turnover of said financial objects.

23. The computer-implemented method according to claim 22, wherein said weighting comprises:

weighting based on a plurality of said economic-centric metrics.

24. The computer-implemented method according to claim 23, wherein said weighting based on said plurality of economic-centric metrics comprises:

weighting based on at least one of;

book value;

book value of operating assets;

sales;

revenue;

profit;

earnings;

cash flow;

cash earnings;

cash flow from operations;

or

a fundamental accounting variable.

25. The computer-implemented method according to claim 23, wherein said weighting based on said plurality of economic-centric metrics comprises:

weighting based on metrics comprising;

book value;

sales; and

cash flow.

26. The computer-implemented method according to claim 22, wherein said third party further manages comprising:

rebalances on a periodic time basis;

or

rebalances on a periodic accounting period basis.

27. An index construction method comprising:

receiving, by at least one computer processor, data about a plurality of entities and a plurality of corresponding financial objects associated with the plurality of entities from at least one database storing and permitting retrieval of such data;

receiving, by the at least one computer processor, data indicative of a set of financial objects comprising a plurality of constituent financial objects;

weighting, by the at least one computer processor, said constituent financial objects, wherein said weighting comprises;

determining, by the at least one computer processor, a proportional fundamental weight for each said constituent financial object based on at least one objective measure of scale associated with said entities or said financial objects;

wherein said at least one objective measure of scale comprises at least one financial metric associated with one of said entities or said financial objects other than the market capitalization of said entities or the price of said financial objects;

 

wherein said at least one financial metric comprises at least one of;

book value;

sales;

cash flow;

or any dividends; and

managing, by the at least one computer processor, a portfolio of financial objects based on said set of financial objects, wherein said managing comprises at least one of;

adjusting, by the at least one computer processor, the financial objects that comprise said portfolio based on changes to the at least one objective measure of scale used to weight the plurality of financial objects used to construct the set of financial objects;

adjusting, by the at least one computer processor, the proportional fundamental weight of the financial objects that comprise said portfolio based on changes to the at least one objective measure of scale used to weight the plurality of financial objects used to construct the set of financial objects;

adjusting, by the at least one computer processor, the proportional fundamental weight of the financial objects that comprise said portfolio based on the at least one objective measure of scale used to weight the plurality of financial objects used to construct the set of financial objects, wherein said adjusting, comprises at least one of;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a power of said financial metric data;

transforming, by the at least one computer processor, at least one of said plurality of financial metric data of said given financial object of said given entity, by taking a fractional power of said financial metric data;

normalizing, by the at least one computer processor, at least one of said plurality of financial metric data, or a transformed financial metric data;

transforming, by the at least one computer processor, said proportional fundamental weight data of said given financial object of said given entity;

transforming, by the at least one computer processor, said proportional fundamental weight data of said given entity, by taking a power of said proportional fundamental weight data;

transforming, by the at least one computer processor, said proportional fundamental weight data of said given entity, by taking a fractional power of said proportional fundamental weight data;

or

normalizing, by the at least one computer processor, said proportional fundamental weight data, or a transformed proportional fundamental weight data;

rebalancing, by the at least one computer processor, the proportional fundamental weight of the financial objects that comprise said portfolio when the weighting of one or more of said financial objects at least one of;

exceeds a threshold value, or deviates from a target weight;

or

rebalancing the proportional fundamental weight of the financial objects that comprise said portfolio to minimize turnover of said financial objects.