Portfolio/Investment Overlay question

[Djobydjoba]

Hi Mark,

I compare a portfolio (green line) to a benchmark (pink line) with the Portfolio/Investment Overlay graph type

With the Portfolio/Investment Overlay > Value, the portfolio value has just passed over the benchmark.

20241123-sam.16h00-01.png (21.01 KiB) Viewed 284 times

With the Portfolio/Investment Overlay > Price + distribution, the portfolio price is still below the benchmark.

20241123-sam.15h59-01.png (20.04 KiB) Viewed 284 times

That surprises me, I thought both methods would show similar patterns.

Do you the see a possible reason for this difference?

PS: minor typo in the help page "Graph Display Options Dialog", section "Allow Fast Portfolio "Price" Calculation for Price + Dist. Overlay Graph":

Affects how the hypothetical portfolio price + distribution is calculated for the for the Portfolio/Investment(s) Price + Dist. Overlay graph.

[Mark]

Hi Djobydjoba,

I suspect the difference is that your portfolio had a $0 value at the beginning, so when calculating the hypothetical price, it wasn't going up, as X% of $0 is still $0. If you compare the 2 cases over a period where you have a positive investment, do they line up better?

Thanks for the correction in the online help...

[Djobydjoba]

I don't know why the start date is 24/11/23 on my screenshots posted above... I thought I had selected "Earliest transaction to date" for the date range, which gives a start date of 27/12/23.

Anyway, if I select "Earliest transaction to date" (so 27/12/23), the mismatch is here too, with nearly identical graphs than those posted. And of course the portfolio value is not 0 then. The mismatch is still there if the start date is set a few days later, up to 02/01/24. When the start date is set to 03/01/24 or after, the benchmark line is then below the portfolio line in both graphs.

This benchmark is used for performance fees, so I would like to have a good confidence with those graphs...

New screenshots of both graphs with the different start dates:
27/12/2023
02/01/2024
03/01/2024

[Mark]

Hi Djobydjoba,

I had to think about this for a minute... I put together an example to make better sense of it. The result is that the reason for the difference is the market timing of when you make contributions into the portfolio. The price version of the overlay graph isn't affected by market timing as far as comparing portfolio to investment. However, the value version is affected by market timing of external contributions.

If contributions are timed well in the portfolio, compared to putting the same money in the overlaid investment, the value version of the portfolio will look better than the price version of the portfolio. The opposite is also true. If there are no contributions, the price/value versions will look the same. Here are some examples to illustrate. Assume you look at a portfolio and index when there are no external contributions: the price/value look the same (call this case 0). However, if you add external money when the portfolio is relatively lower than the index investment (call this case 1), the result is the portfolio value moves up compared to case 0. If you add external money when the portfolio is relatively higher than the index (call this case 2), the portfolio value will be lower than case 0.

Case 1

1fund.png (9.61 KiB) Viewed 185 times

Case 1 - Price version

1fund_price.png (8.3 KiB) Viewed 185 times

Case 1 - Value version

1fund_value.png (8.67 KiB) Viewed 185 times

You can see in Case 1 the value version of the portfolio has performed better than its price version. If we reverse this and invest money into the portfolio when it is relatively high:

Case 2

1fund_badtiming.png (7.66 KiB) Viewed 185 times

Case 2 - Value version

1fund_value_badtiming.png (8.66 KiB) Viewed 185 times

You can see in Case 2 the value version of the portfolio has performed worse.

The bottom line is that the overlaid value version suffers/benefits from bad/good market timing of external contributions when comparing relative performance of an index to a portfolio. The definition of good/bad here is good timing into the portfolio compared to timing into the investment. If they are both down when you invest, this won't make a difference, but if the portfolio is down more than the index when you invest, this helps the relative performance of the portfolio's value. I used a "linear" benchmark in these graphs, so the definition of good/bad timing is more clear by just looking at the timing into the portfolio.

[Djobydjoba]

Hi Mark,

Thanks very much for the full explanation. It took me several readings (much more than the minute it took you to think about it ) but I do get the idea now. Thanks again.