Here's a common refrain I've heard from advisers over the past two years: “It is a shame I couldn't better account for the economy in adjusting my clients' portfolios.”
Being able to do just that is the trademark of an advanced online application called MacroRisk Analytics (“The Economy Matters” is a registered trademark of the app's owners — no kidding).
This program is the creation of the Center for Computationally Advanced Statistical Techniques and is owned by c4cast.com Inc.
The company and its program had a coming-out party this month at the Financial Planning Association's national conference in Denver, where it formally introduced an adviser-oriented subscription to the application.
Unless you work for a Wall Street investment bank and have a staff of economists on call, a tool such as MacroRisk Analytics is the only practical way I know of for an adviser to examine investment portfolios or individual assets through the prism of 18 key economic factors.
Even so, prior to the meltdown, I suspect the company's application would have been a hard sell.
With the economy in a more or less constant state of growth, adding an additional layer of economics-centered analysis to the typical investment portfolio made little sense.
Hindsight being 20/20, having such a tool in your advisory arsenal is now a no-brainer.
MacroRisk Analytics has been perfecting its system and underlying methodology over much of the past decade through the use of a more complex and expensive version of its product in consulting engagements with big Wall Street firms, said Michael Phillips, the company's chief executive and chief scientist.
“We decided that if we could remove some of the complexities, such that you don't need me or a Ph.D. to understand them, this could be a very powerful tool for planners and [registered investment advisers],” he said. (See the accompanying slideshow, above left, for more on how the application looks and works)
“The application allows you to create a portfolio that is in tune with the current economy and screen stocks looking for risks you are otherwise unable to identify,” Mr. Phillips said.
Forming the heart of the application are 18 macroeconomic variables that are viewed as greatly influencing the performance of individual assets. These are referred to as macro risk factors and include components as varied as the Gold Index, corporate-bond yield, Consumer Price Index, agricultural exports, auto sales and energy prices.
Taken together, they represent an asset's “eta” measure: a description of how an asset typically responds to a specific change in the economy.
The tool lets you identify a client's economic risks, find and take advantage of economic changes and better comply with the Uniform Prudent Investor Act.
“What we are doing, I view more as triage,” Mr. Phillips said, explaining that the program is meant to assist advisers in altering portfolios in such a way that they are in tune with — and can take the best advantage of — the current economic state.
He explained that such factors generally are overlooked when portfolio analysis is limited to modern portfolio theory and traditional methods of sector diversification.
“Many people I think would be horrified to find how just how out of tune their portfolios actually are,” he said.
Of the company's 15-member staff, several are from the California Institute of Technology, and one-third are academics.
It also happens to have its own supercomputing resources and does not have to rely on any academic institution or third-party financial services company for its calculations.
Despite how much more simplified the adviser-oriented tools are, I have far too little space available here to delve too deeply into the application.
Perhaps the most useful set of tools in the application will be portfolio analysis.
Advisers can use either the Import Temporary Portfolio page within the Holdings Overview Report (where you can either manually enter or cut and paste a client's portfolio from a spreadsheet) or the New Portfolio tool on the user dashboard.
Once generated, the Holdings report lists the name, symbol, shares, portfolio weight (percentage value), dollar amount and then the interesting stuff — graphical representations of the core mortgage risk index, climate rating, eta measure and model Rē (which is a measure of the overall economy's influence) for each asset in the portfolio and the portfolio as a whole. You can hover over each graph for a larger, more detailed version of it and see additional information.
That is just one of several reports available, and this description doesn't scratch the surface of what an adviser has access to by using MacroRisk Analytics. The website has a great deal of explanatory detail going into what the tool can do, and those who subscribe receive several sessions of online training, can request help afterward and have access to many other resources to get them comfortable with what the application can do — and not do.
For advisers, especially those who manage their clients' assets and portfolios, the introductory pricing — available over the next six to eight months — for the three components in the adviser subscription to MacroRisk Analytics seems quite reasonable: $1,500 for a one-year single-seat license to its reporting tools, $2,900 for the screening tools and $2,900 for the portfolio optimization tools, or a bundle of all three for $5,800. After this first year, the company plans to raise the pricing to about $12,000 per year.
Although the company declined to cite specific firms for the record, it is in discussions with several custodians and broker-dealers.
That, of course, would be another way for advisers to gain discounted access to the tools.
“We are hopeful that with this set of tools ... we have given advisers something they didn't have before; it is new, supplemental, an overlay that has never been available to them in a useful, user-friendly way before,” Mr. Phillips said.
For more information visit MacroRisk Analytics online.
E-mail Davis D. Janowski at firstname.lastname@example.org.