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Models 101

  • Updated

Model performance is shown using either ‘Historical’ or ‘Hypothetical’ model target allocations over time.

  • The Historical method will start with the oldest set of investments and target allocations which were entered in the system. Then, based on any changes entered for the model over time (investments or allocations), the model performance will be calculated using those changes.
  • The Hypothetical method will take the current investments and target allocations (as they exist today) and assume they have remained this way over the last 10 years.

In both methods, the monthly returns utilized represent historical performance of the underlying investments.

 

The calculations for each performance type are listed below:

Historical Performance

  1. Starting with the earliest time period the advisor enters into the model history, we calculate a blended monthly return using the model’s investments and allocations.
    • If an investment is missing a 1-mo return from a period (it’s a newer investment that did not exist in the past), the rest of the investments are re-weighted for that period so that the model totals 100%.
  2. After calculating the blended monthly return, we check the selected rebalancing method and rebalance if needed back to the latest allocation specified by the advisor. (we will always select the model allocation that was closest, but prior to, the period in which the rebalancing occurred)
    • If monthly – Rebalance every month
    • If quarterly – Rebalance only on Jan 1, April 1, July 1 and October 1
    • If semi-annually – Rebalance only on Jan 1 and July 1
    • If annually – Rebalance only on Jan 1
    • If manual - Does not re-balance until a time period with target allocations was entered. A.k.a. rebalancing is based only on user defined time periods/allocations saved in the model.
  3. If rebalancing is not needed for a given month, continue to grow the model and its allocations based on the growth from the prior period.
  4. We continue to repeat steps 1-3 until we finish calculating the full monthly return stream up through the most recent month-end.
  5. We then calculate the metrics shown on the report (annualized returns, risk metrics, etc.) using this return stream.

 

Hypothetical Performance

  1. Starting 10 years ago, we calculate a blended monthly return using the model’s current investments and allocations.
    • If an investment is missing a 1-mo return from a period (it’s a newer investment that did not exist in the past), the rest of the investments are re-weighted for that period so that the model totals 100%.
  2. After calculating the blended monthly return, we check the selected rebalancing method and rebalance if needed back to the current allocation.
    • If monthly – Rebalance every month
    • If quarterly – Rebalance only on Jan 1, April 1, July 1 and October 1
    • If semi-annually – Rebalance only on Jan 1 and July 1
    • If annually – Rebalance only on Jan 1
    • If manual - Does not re-balance
  3. If rebalancing is not needed for a given month, continue to grow the model and its allocations based on the growth from the prior period.
  4. We continue to repeat steps 1-3 until we finish calculating the full monthly return stream up through the most recent month-end.
  5. We then calculate the metrics shown on the report (annualized returns, risk metrics, etc.) using this return stream.

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