Using accounting data based indexing to create a portfolio of assets

• US RE44,098 E1
• Filed: 08/08/2012
• Issued: 03/19/2013
• 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 D., Wood, Paul C.
• Primary Examiner(s): JOHNSON, GREGORY L
• Application Number:
  US13/569,200
• Time in Patent Office: 223 Days
• Field of Search: None
• US Class Current: 705/36.R
• 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

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 computer-implemented method for construction of an index of financial objects, the computer-implemented method comprising:

creating, by at least one computer, the index of the financial objects, said creating comprises;

selecting, by the at least one computer, financial objects as constituents of the index based upon at least one accounting data regarding entities issuing the financial objects rather than price of the financial objects, wherein the at least one accounting data comprises at least one of;

cash flow of the entities issuing the financial objects, sales of the entities issuing the financial objects, book value of the entities issuing the financial objects or any dividends of the entities issuing the financial objects; and

weighting, by the at least one computer, the constituents of the index based upon at least one accounting data regarding the entities issuing the financial objects rather than price of the financial objects, to obtain constituent weightings of the constituents of the index, wherein the at least one accounting data comprises at least one of;

cash flow of the entities issuing the financial objects, sales of the entities issuing the financial objects, book value of the entities issuing the financial objects or any dividends of the entities issuing the financial objects, and

managing, by the at least one computer, the index, and managing at least one portfolio of financial objects based on the index comprising;

altering, by the at least one computer, the relative weightings of the financial objects within said at least one portfolio of financial objects based on the index as the at least one accounting data concerning the entities of the financial objects changes or the constituents of the index change over time.

2. The computer-implemented method of claim 1, wherein the computer implemented method comprises:

creating, by the at least one computer, said index of financial objects wherein the constituent weightings are based upon any ratio of at least one accounting data, or any manipulation of at least one accounting data, that is contained within a company financial report.

3. The computer-implemented method of claim 1, wherein the computer implemented method comprises:

creating, by the at least one computer, said index of financial objects wherein the constituent weightings are based upon any ratio of at least one accounting data per share, or any manipulation of at least one accounting data, that is contained within a company financial report.

4. The computer implemented method of claim 1, wherein said altering comprises at least one of:

altering based on at least one of;

changes in relative weightings of financial objects in said index;

or changes in said financial objects that are members of said index;

or

altering at the time of at least one of;

when, or after, at least one entity associated with a given financial object of said index reports its accounting information.

5. The computer-implemented 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 or a security, wherein said financial instrument or said security denotes a debt, an equity interest, or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, 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;

or

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

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

6. The method of claim 1, wherein said at least one accounting data rather than price further comprises at least one of:

inventory of the entity;

revenue of the entity;

sales of the entity;

income of the entity;

book income of the entity;

taxable income of the entity;

earnings growth rate of the entity;

earnings before interest and tax (EBIT) of the entity;

earnings before interest, taxes, depreciation, and amortization (EBITDA) of the entity;

expected earnings of the entity;

retained earnings of the entity;

expected revenue of the entity;

number of employees of the entity;

capital expenditures of the entity;

salaries of the entity;

book value of the entity;

assets of the entity;

fixed assets of the entity;

current assets of the entity;

quality of assets of the entity;

operating assets of the entity;

intangible assets of the entity;

dividends of the entity;

gross dividends of the entity;

dividend yields of the entity;

expected dividends of the entity;

cash flow of the entity;

expected cash flow of the entity;

liabilities of the entity;

losses of the entity;

long term liabilities of the entity;

short term liabilities of the entity;

liquidity of the entity;

long term debt of the entity;

short term debt of the entity;

bonds of the entity;

corporate bonds of the entity;

net worth of the entity;

shareholder equity of the entity;

goodwill of the entity;

research and development expenditures of the entity;

costs of the entity;

cost of goods sold (COGS) of the entity;

or

research and development costs of the entity.

7. The computer-implemented method of claim 1, wherein the computer implemented method comprises:

creating, by the at least one computer, said index wherein the constituent weightings are based upon weighting of said cash flows of the entities issuing the financial objects, said sales of the entities issuing the financial objects, and said book value of the entities issuing the financial objects.

8. The computer-implemented method of claim 1, wherein the computer implemented method comprises:

creating, by the at least one computer, said index wherein the constituent weightings are based upon equally weighting said cash flows of the entities issuing the financial objects, said sales of the entities issuing the financial objects, and said book value of the entities issuing the financial objects.

9. The computer-implemented method of claim 1, wherein the constituent weightings are based upon equally weighting said cash flows of the entities issuing the financial objects, said sales of the entities issuing the financial objects, and said book value of the entities issuing the financial objects, at ⅓

each.

10. The computer-implemented method of claim 1, wherein the computer implemented method comprises:

creating, by the at least one computer, said index wherein the constituent weightings are based upon weighting of said cash flows of the entities issuing the financial objects, said sales of the entities issuing the financial objects, said book value of the entities issuing the financial objects, and said any dividends of the entities issuing the financial objects.

11. The computer-implemented method of claim 1, wherein the computer implemented method comprises:

creating, by the at least one computer, said index wherein the constituent weightings are based upon equally weighting of said cash flows of the entities issuing the financial objects, said sales of the entities issuing the financial objects, said book value of the entities issuing the financial objects, and said any dividends of the entities issuing the financial objects.

12. The computer-implemented method of claim 1, wherein the constituent weightings are based upon:

equally weighting by the at least one computer, said cash flows of the entities issuing the financial objects, said sales of the entities issuing the financial objects, said book value of the entities issuing the financial objects, and said any dividends of the entities issuing the financial objects, at ¼

each, for financial objects with dividends; and

equally weighting by the at least one computer, said cash flows of the entities issuing the financial objects, said sales of the entities issuing the financial objects, and said book value of the entities issuing the financial objects, at ⅓

each, for financial objects with no dividends.

13. The computer-implemented method of claim 1, wherein the constituent weighting of the entity of the financial object is based upon the at least one accounting data of the entity of the financial object relative to the total at least one accounting data of the entities of the financial objects.

14. The computer-implemented method of claim 1, wherein the constituent weightings are adjusted based on at least one of:

a country, a sovereign of origin of the entity of the financial object, or an industry sector of the entity of the financial object.

15. The computer-implemented method of claim 1, wherein said selecting comprises selecting, by the at least one computer, a set of the entities of the financial objects of a universe of financial objects.

16. The computer-implemented method of claim 15, wherein said selecting is relative to the at least one accounting data of the entities of the financial objects of the universe.

17. The computer-implemented method of claim 16, wherein said selecting comprises:

selecting by the at least one computer, the set of the entities of the financial objects based on weighting the relative size of the at least one accounting data of the entity of each financial object relative to a total of the at least one accounting data of the entities of the financial objects of the universe.

18. The computer-implemented method of claim 15, wherein said any dividends of the entities of the financial objects comprise the averaged total dividend distributions of the entities of the financial objects for a period of time, said cash flows of the entities of the financial objects comprise the averaged cash flow of the entities of the financial objects for the period of time, and said sales of the entities of the financial objects comprise the averaged sales of the entities of the financial objects for the period of time.

19. The computer-implemented method of claim 18, wherein the period of time

comprises at least one of:

at least a quarter, at least a year, or at least five years.

20. The computer-implemented method of claim 15, wherein said selecting comprises:

selecting, by the at least one computer, a set of the entities of the financial objects based upon weighting the relative size of an average of the at least one accounting data of the entity of the financial object relative to a total of the averaged at least one accounting data of the entities of the financial objects of said universe.

21. The computer-implemented method of claim 15, wherein said selecting the set comprises:

calculating, by the at least one computer, measures of value for the entities of the financial objects based upon said at least one accounting data regarding the entities of the financial objects; and

selecting, by the at least one computer, a set of the entities of the financial objects based on the measures of value.

22. The computer-implemented method of claim 21, wherein said selecting the set of the entities of the financial objects comprises selecting, by the at least one computer, a fixed number of the entities of the financial objects with the largest measures of value from the universe.

23. The computer-implemented method of claim 15, wherein said universe comprises at least one of:

publicly traded companies;

a sector;

a market;

a market sector;

an industry sector;

a geographic sector;

an international sector;

a sub-industry sector;

a government issue;

or

a tax exempt financial object.

24. The computer-implemented method of claim 15, wherein said weighting comprises:

determining by the at least one computer, the constituent weighting of the entities of the financial objects of the set, by the at least one computer, based upon weighting the relative size of an average of the at least one accounting data of entities issuing financial objects for a period of time relative to a total of the averaged at least one accounting data of the entities of the financial objects of said universe.

25. The computer-implemented method of claim 1, wherein the constituent weightings of the entities of the financial objects are based on a proportion of types of financial objects issued by the same entity.

26. The computer-implemented method of claim 1, further comprising:

(a) gathering, by the at least one computer, the at least one accounting data about a plurality of the financial objects;

(b) selecting, by the at least one computer, a plurality of financial objects based on an objective measure of scale comprising at least one accounting data of the entity associated with each of said plurality of financial objects to create said index of financial objects; and

(c) weighting, by the at least one computer, each of said plurality of financial objects selected in said index based on an objective measure of scale comprising at least one accounting data of the entity associated with each of said plurality of financial objects,

wherein said weighting comprises;

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

(ii) weighting is exclusive of weighting based on market capitalization, equal weighting, and share price weighting.

27. The method according to claim 26, wherein said weighting based on the objective measure of scale comprises weighting by the at least one computer based on said any dividends of the entities issuing the financial objects, said book value of the entities issuing the financial objects, said cash flows of the entities issuing the financial objects, or said sales of the entities issuing the financial objects.

28. The method of claim 27, further comprising equally weighting by the at least one computer, each objective measure of scale.

29. The method of claim 26, wherein (c) comprises weighting by the at least one computer based on said objective measure of scale, wherein said objective measure of scale comprises a measure of the entity size associated with each of said plurality of financial objects.

30. The method of claim 29, wherein said measure of the entity size comprises at least one of:

inventory of the entity;

revenue of the entity;

sales of the entity;

income of the entity;

book income of the entity;

taxable income of the entity;

earnings growth rate of the entity;

earnings before interest and tax (EBIT) of the entity;

earnings before interest, taxes, depreciation, and amortization (EBITDA) of the entity;

expected earnings of the entity;

retained earnings of the entity;

expected revenue of the entity;

number of employees of the entity;

capital expenditures of the entity;

salaries of the entity;

book value of the entity;

assets of the entity;

fixed assets of the entity;

current assets of the entity;

quality of assets of the entity;

operating assets of the entity;

intangible assets of the entity;

dividends of the entity;

gross dividends of the entity;

dividend yields of the entity;

expected dividend of the entity;

cash flow of the entity;

expected cash flow of the entity;

liabilities of the entity;

losses of the entity;

long term liabilities of the entity;

short term liabilities of the entity;

liquidity of the entity;

long term debt of the entity;

short term debt of the entity;

bonds of the entity;

corporate bonds of the entity;

net worth of the entity;

shareholder equity of the entity;

goodwill of the entity;

research and development expenditures of the entity;

costs of the entity;

cost of goods sold (COGS) of the entity;

or

research and development costs of the entity.

31. A computer-implemented method of claim 1, further comprising:

creating, by at least one computer, a portfolio of financial objects comprising purchasing constituent financial objects of the index in proportion to the constituent weightings of the constituents of the index.

32. The method of claim 1, wherein said at least one accounting data rather than price further 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;

or

a payout ratio.

33. The computer-implemented method of claim 1, further comprising:

selecting a subset of a universe of financial objects based on at least one of;

a liquidity of the financial objects, or a minimum size of said entity of said financial object.

34. The computer-implemented method of claim 1, wherein said at least one accounting data regarding entities issuing the financial objects further comprises net income of the entities issuing the financial objects.

35. The computer-implemented method of claim 1, wherein said selecting comprises:

calculating a first weight of a first accounting data of said at least one accounting data regarding an entity;

calculating a second weight of a second accounting data of said at least one accounting data regarding the entity;

averaging the first weight and the second weight to obtain an averaged weight; and

selecting the entity based on the averaged weight.

36. The computer-implemented method of claim 1, wherein said weighting comprises:

calculating a first weight of a first accounting data of said at least one accounting data regarding an entity;

calculating a second weight of a second accounting data of said at least one accounting data regarding the entity;

averaging the first weight and the second weight to obtain an averaged weight; and

weighting the entity based on the averaged weight.

37. The computer-implemented method of claim 1, further comprising:

quarterly rebalancing the index of financial objects.

38. The method according to claim 1, wherein said selecting said financial objects further comprises selecting a universe and selecting a subset of said universe.

39. The method according to claim 38, wherein said subset comprises at least one of:

a subset based upon at least one criteria;

a sector;

a market;

a market sector;

an industry sector;

a geographic sector;

an international sector;

a sub-industry sector;

a government issue;

or

a tax exempt financial object.

40. The method according to claim 38, wherein said universe comprises at least one of:

publicly traded stocks of at least one of;

at least one country, or at least one country'"'"'s at least one stock market;

at least one sector;

at least one market;

at least one market sector;

at least one growth market sector;

at least one value market sector;

at least one industry sector;

at least one geographic sector;

at least one international sector;

at least one sub-industry sector;

at least one government issue;

at least one measure of value;

at least one price-based ratio sector;

at least one size of an entity;

at least one market size of an entity;

any measure of size of an entity;

at least one size of a company;

or

at least one tax exempt financial object.

41. The method according to claim 38, wherein said selecting said subset of said universe comprises selecting upon at least one of:

a liquidity of the financial objects, or a minimum size of the entity of the financial object.

42. The method according to claim 38, wherein said selecting said subset comprises selecting, by the at least one processor based on user input, said subset based on any measure of company size.

43. The method according to claim 42, wherein said selecting said subset comprises selecting, by the at least one processor based on user input, said subset based on at least one of:

a maximum measure of company size, a minimum measure of company size, or a range of measures of company size.

44. The method according to claim 38, wherein said selecting said universe comprises selecting a universe based on any measure of company size.

45. The method according to claim 44, wherein said selecting said subset comprises selecting, by the at least one processor based on user input, said subset based upon at least one of:

a minimum measure of said company size;

a maximum measure of said company size, or a range of measures of said company size.

46. The method according to claim 38, further comprising:

wherein at least one of said selecting said universe or said selecting said subset, further comprises;

selecting, by the at least one processor based on user input, based upon a measure of company size comprising at least one of;

a large cap, a mid cap, or a small cap.

47. The method according to claim 38, further comprising:

dividing, by the at least one processor based on user input, said index into at least one partition of said index based upon at least one measure of scale of entities of the financial objects in said index.

48. The method according to claim 38, further comprising:

selecting, by the at least one processor based on user input, at least a portion of said index based upon any measure of scale of entities of the financial objects in said index.

49. The method according to claim 38, wherein said universe comprises publicly traded stocks of all companies in at least one of:

a given country;

or at least one stock market of a given country.

50. The method according to claim 38, wherein said subset is selected based upon a measure of company size comprising 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;

or

a payout ratio.

51. The method according to claim 1, further comprising:

selecting, by the at least one processor based on user input, a subset of an accounting data based index (ADBI) based on a measure of scale of entities in said ADBI.

52. The method according to claim 1, wherein said creating said index, said managing said index, and said managing said at least one portfolio are performed by at least one of:

a same entity as, or one or more separate entities.

53. A computer-implemented method for construction of a portfolio based on an index, wherein selecting financial objects as constituents of the index and weighting of the constituents of the index is based upon at least one accounting data regarding entities issuing the financial objects rather than price data of the financial object, the computer-implemented method comprising:

creating, by at least one computer, the portfolio of financial objects comprising purchasing constituent financial objects of the index in proportion to constituent weightings of the constituents of the index, wherein the index was created by an index provider having;

selected, by the at least one computer, financial objects as said constituents of the index based upon at least one accounting data regarding entities issuing the financial objects rather than price of the financial objects, wherein the at least one accounting data comprises at least one of;

cash flow of the entities issuing the financial objects, sales of the entities issuing the financial objects, book value of the entities issuing the financial objects or any dividends of the entities issuing the financial objects; and

weighted, by the at least one computer, the constituents of the index based on at least one accounting data related to the entities of the financial objects rather than price of the financial objects, to obtain the constituent weightings of the constituents of the index, wherein the at least one accounting data comprises at least one of;

cash flow of the entities issuing the financial objects, sales of the entities issuing the financial objects, book value of the entities issuing the financial objects or any dividends of the entities issuing the financial objects, and

managing the portfolio comprising;

purchasing, by the at least one computer, financial objects at least one of;

added to the index or having increased constituent weighting over time; and

selling, by the at least one computer, financial objects at least one of;

removed from the index or having decreased constituent weighting over time.

54. The computer-implemented method of claim 53, wherein said at least one accounting data regarding entities issuing the financial objects further comprises net income of the entities issuing the financial objects.

55. The method according to claim 53, wherein said creating said portfolio, said purchasing, said selling, and said managing are performed by at least one of:

a same entity as, or one or more separate entities other than, the index provider.

56. A computer-implemented method for construction of an index and portfolio of financial objects based upon cash flow, sales, book value, and any dividends of the financial objects, the computer-implemented method comprising:

creating, by at least one computer, an index of the financial objects, comprising;

selecting, by the at least one computer, a plurality of selected financial objects to be placed in said index wherein said selecting comprises;

selecting, by the at least one computer, financial objects to be placed in said index based upon a cash flow, or a ratio of said cash flow, of an entity associated with a given financial object,

selecting, by the at least one computer, the financial objects to be placed in said index based upon sales, or a ratio of said sales, of the entity associated with the given financial object,

selecting, by the at least one computer, the financial objects to be placed in said index based upon a book value, or a ratio of said book value, of the entity associated with the given financial object, and

selecting, by the at least one computer, the financial objects to be placed in said index based upon any dividends, or a ratio of said any dividends, of the entity associated with the given financial object; and

weighting, by the at least one computer, said plurality of selected financial objects placed in said index,

wherein said weighting comprises;

weighting, by the at least one computer, said selected financial objects placed in said index based upon a cash flow, or a ratio of said cash flow, of an entity associated with a given financial object,

weighting, by the at least one computer, said selected financial objects placed in said index based upon sales, or a ratio of said sales, of the entity associated with the given financial object,

weighting, by the at least one computer, said selected financial objects placed in said index based upon a book value, or a ratio of said book value, of the entity associated with the given financial object, and

weighting, by the at least one computer, said selected financial objects placed in said index based upon any dividends, or a ratio of said any dividends, of the entity associated with the given financial object; and

creating, by the at least one computer, at least one portfolio of financial objects based on said index comprising;

purchasing, by the at least one computer, said selected financial objects placed in said index in proportion to said weightings based upon said cash flow, said sales, said book value, and said any dividends, or said ratio of said cash flow, said ratio of said sales, said ratio of said book value, and said ratio of said any dividends, and placing said purchased financial objects into said at least one portfolio.

57. The computer-implemented method of claim 56, wherein the computer implemented method comprises:

creating, by the at least one computer, said index of financial objects, and said at least one portfolio of financial objects based on said index wherein said weightings are based upon at least one of;

any ratio of at least one accounting data, any ratio of at least one accounting data per share, or any manipulation of at least one accounting data, wherein the at least one accounting data is contained within a company financial report.

58. The computer implemented method of claim 56, wherein the computer implemented method comprises:

managing, by the at least one computer, said index, and said at least one portfolio of financial objects based on said index comprising;

altering, by the at least one computer, said at least one portfolio based on said index as the at least one accounting data concerning the entities of the financial objects changes or said plurality of selected financial objects placed in said index change over time.

59. The computer implemented method of claim 58, wherein said altering comprises at least one of:

altering based on at least one of;

changes in said weightings of financial objects in said index or changes in said financial objects that are placed in said index;

or

altering at the time of at least one of;

when, or after, at least one entity associated with a given financial object of said index reports its accounting information.

60. The computer-implemented method of claim 56, 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 or a security, wherein said financial instrument or said security denotes a debt, an equity interest, or a hybrid;

a derivatives contract, including at least one of;

a future, a forward, a put, a call, an option, a swap, 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;

or

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

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

61. The computer-implemented method of claim 56, further comprising:

quarterly rebalancing the index.