Value Screening and Performance Attribution Using Telemet Orion Investment

Platform – Class Room Application

Mussie Teclezion

Austin E. Cofrin School of Business

University of Wisconsin – Green Bay

I. Introduction

Security analysis and portfolio management are very important skill sets; thus, are part of

finance curriculum in business schools. Different investment and portfolio management

text books cover the material at different levels of rigor. A practical application of

portfolio construction and performance evaluation has become easier with the availability

of data from the internet and the development of tools that help investors in selection of

securities and performance evaluation of the portfolios. The same tools could be very

beneficial in narrowing the gap between the class room coverage of the material and

practical application of the portfolio construction and evaluation process.

This paper will outline the process that could be very easily applied in a typical principles

of investment class. It starts with the selection of securities, executing the trades, and

finally evaluating performance using the Multi-Style Attribution analysis of Telemet

Orion investment platform. A similar process has been applied in principles of

investment course at University of Wisconsin – Green Bay. To implement the process

students selected securities using the data available in Telemet Orion platform, executed

several trades throughout the semester using StockTrak simulation software and finally

evaluated the performance of their portfolio using Multi-Style Attribution analysis

capability of Telemet Orion. Different students used different methods of screening to

select securities and placed the trades throughout the semester. Students were able to

easily upload their transaction history from StockTrak to Telemet Orion so as to conduct

attribution analysis.

Telemet Orion is an investment platform that combines real-time and historical

information, and has extensive utility for investment research and performance

evaluation. However, this white paper will focus on some key tools of the platform that

could easily be incorporated into a typical investments curriculum. First, Telemet Orion

screening tool will be utilized to select securities that qualify several criteria. Second, the

portfolio of equities will be analyzed by utilizing the Multi-Style Attribution analysis of

Telemet Orion.

II. Value Investing and Equity Screening

Finding screening criteria for selecting equities that will outperform a benchmark is an

endeavor that many investors are willing to take. The investment practice is full of

different screening criteria that attempt to filter winner securities, out of the universe of

publicly traded securities, for a particular horizon. There are several services available to

investors that help them screen equities based on fundamental and technical metrics. For

example, the American Association of Individual Investors (AAII) provides list of stocks

that pass different screens representing more than 60 investment strategies

(http://www.aaii.com/stock-screens). Schadler and Cotton (2008) have examined the

effectiveness of AAII stock screens and report 32% of the screens significantly

outperformed the S&P 500 when transaction costs were taken into account.

Among many popular screening criteria is the one developed by Graham and Rea (Rea,

1977; Oppenheimer, 1984). Known as a father of security analysis whose screening

criteria have been widely used, Benjamin Graham authored two widely used books:

“Security Analysis” with David Dodd, and “The Intelligent Investor.” Graham outlined

certain criteria for screening value equities. The criteria are as follows:

(1) An earnings-to-price yield at least twice the AAA bond yield.

(2) A price-earnings ratio less than 40 per cent of the highest price-earnings ratio the

stock had over the past five years.

(3) A dividend yield of at least two-thirds the AAA bond yield.

(4) Stock price below two-thirds of tangible book value per share.

(5) Stock price below two-thirds "net current asset value."

(6) Total debt less than book value.

(7) Current ratio greater than two.

(8) Total debt less than twice "net current asset value."

(9) Earnings growth of prior 10 years at least at a 7 per cent annual (compound) rate.

(10) Stability of growth of earnings in that no more than two declines of 5 per cent or

more in year-end earnings in the prior 10 years are permissible.

According Graham and Rea (Oppenheimer, 1984), the first five criteria are measures of

return or reward, while the second five criteria are measures of risk. Depending on

different investment phases, finding several equities that pass all 10 criteria may be very

difficult; therefore, investors could use different combinations of the criteria.

Oppenheimer (1984) test several combinations of the criteria on NYSE-AMEX universe

of securities of firms, over the years 1974 through 1981. They find positive excess return

from portfolio created using Graham’s selection criteria. Kerch and Maritz (1997) find

positive abnormal return when applying Graham’s selection criteria to industrial shares

traded on Johannesburg Stock Exchange.

In this paper, we construct a portfolio using a subset of Graham’s criteria and evaluate its

performance using the Multi-Style Attribution analysis of Telemet Orion. In addition,

more in-depth financial analysis could be undertaken on the securities that pass through

the screening criteria. However, Graham recognized that financial mistakes could be

mitigated by holding diversified portfolio. Thus, we hold a bit more than 30 stocks in the

portfolio.

Different screening methods carry different risk-reward combination; therefore, there are

benefits to be derived from having screening capability in an investor’s arsenal. First,

they are great ways of narrowing down universe of equities into investable pools based

on the investment philosophy and the strategy of an investor. The investor could then

devote more time and resources in further analyzing a select few equities that qualify the

screening criteria. Second, they could be useful as objective and non-biased rules that an

investor could follow. Third, some equities with certain characteristics have been shown

to outperform the rest of the group, specifically equities with low price to earnings ratio,

as well as firms with low price to book ratio (Damodaran, 2012). Normally investor

would want to incorporate some variation of those criteria. Finally, it makes for a good

class room activity as it incorporates some major steps involved in the investment

selection and performance evaluation of a portfolio. It is could be done by every student

in the class and is a very helpful activity that can enhance student’s feel for the market.

III. Equity screeners and Telemet Orion’s Capability

Telemet Orion has extensive list of data items and provides tremendous flexibility in

using them. The list of data items that could be incorporated in screening equities is

available in the site as well as the help menu:

(http://www.taquote.com/protected/download/documents/columns8-1-01-04.pdf;

http://65.105.114.35/orion/html-web/index.html). We used some of them to screen

equities out the universe of equities available in the platform. The screening criteria used

in this paper are as follows:

1. P/E as of the end of last fiscal year is less than 14. This criterion is based on the

first one used by Graham and Rae. An earnings-to-price yield of at least twice the

AAA bond yield. AAA bond yield in June 2012 was around 3.6% (Damodoran,

2012). That translates to P/E ratio of about 14. While the screening is done on

02/10/2012, the evaluation period for attribution analysis runs for the calendar

year of 2012, thus P/E ratio of the last fiscal year was chosen for screening.

2. Total debt is less than book value of equity.

3. Current ratio is greater than two.

4. Total debt less than twice "net current asset value."

5. Earnings growth of prior 10 years at least at a 7 per cent. The growth rate

provided by Telemet Orion covers the entire 10 year period. Screening equities

for annual growth of 7% over the 10 year period would have eliminated almost all

the firms that qualified based on our other criteria. Thus, this criterion is used only

to exclude firms with earnings growth of less than 7% over the 10 year period.

6. A positive earnings per share for last trailing four quarters.

7. Issue type was required to be common stock.

8. A dividend yield of at least two-thirds of the AAA bond yield.

Applying the screening criteria in Telemet Orion could be done by opening a new

display, then a new search screen, selecting the name of the screen, and applying

different criteria. Some screen shots are provided below. The screening criteria used in

this paper could also be seen below as part of Telemet Orion screen.

A. Opening a new search screen

B. Saving the screen

C. Selecting screening criteria. Queries can be saved, edited, and resubmitted

multiple times.

D. Result of the value screener

Running the screener resulted in the following equities. In addition, columns of

several market-related and fundamental data items could be added very easily.

Issue Last PE LFY EG% 10Y YLD LFY Issue Last PE LFY EG% 10Y YLD LFY

AFAM 20.34 7.46 81.22 12.06 HFC 56.26 3.64 24.37 18.96

AIR 18.78 7.3 20.92 4.36 HITK 36.45 9.08 65.72 4.6

ATK 66.28 6.32 8.67 3.43 IAG 8.7 7.4 9.52 3

ATVI 13.41 13.25 35.87 2.8 INGR 65.3 9.89 16.97 3.27

BAX 69 12.75 17.56 5.73 ITW 62.72 10.03 8.67 3.03

BKE 45.4 13.56 19.63 19.26 JCOM 31.52 11.58 23.35 4.53

CALM 41.28 9.29 35.21 4.84 JST 6.11 5.59 23.88 3.95

CASC 64.75 10.18 25.02 4.05 KMT 40.55 8.79 37.61 3.08

CECE 10.88 10.88 7.83 3.78 KWR 57.55 11.21 15.7 5.57

CSCO 21.16 10.53 8.72 3.57 MAXY 2.48 3.13 11.89 63.94

CTB 25.67 3.49 16.12 6 NPK 74.25 13.41 32.28 22.17

DLB 31.74 13.31 23.05 12.21 PLPC 68.1 10.32 13.87 3.35

DO 74.81 13.12 11.42 6.44 SCL 60.2 12.49 25.52 2.77

DORM 36.15 12.6 19.95 8.12 SHS 55.19 7.64 53.43 3.87

DSW 68.59 10.89 23.75 10.45 TRLG 27.71 13.97 10.92 3.15

FCX 35.64 10.72 30.92 4.39 USPH 24.81 11.24 10.83 5.49

GES 28.08 10.23 52.82 9.57 WOR 28.32 9.85 13.51 6.77

GLW 12.28 10.97 12.91 3.21

A portfolio that consists of 1000 shares of each company is evaluated for an investment

horizon of one year. Prices are taken from Telemet Orion data. For actual transactions, a

transaction based data could be entered into the platform very easily.

IV. Multi-Style Performance Attribution

Often, performance evaluation covered in an introductory investments class is based on

raw return as well as risk adjusted metrics that are typically used in the investment

management industry. Besides comparing the raw return of a portfolio against a

benchmark, commonly used metrics include: Sharpe ratio, Treynor ratio, and Jensen’s

alpha. While such commonly used metrics are very essential, performance attribution is a

widely used industry practice. Although the performance metrics could be computed in

excel, the ability to readily and easily generate the metrics for any period of time makes

the investment platform very useful. In addition, the detailed output from the platform

gives students familiarity with performance evaluation methods that are widely used in

the investment management industry.

The Multi-style Attribution analysis generated from Telemet Orion is very easy to use

and has rich and detailed output. It provides the following output windows: Attribution

summary, Performance summary, Contribution summary, Cummulative performance,

Subperiod attribution, Attribution Analysis, Subperiod weights, Allocation Scatterplot,

Contribution Details, and Performance Characteristics.

Our portfolio in this paper includes investment of 1,000 shares in each of the companies.

Initial purchase price of the securities is automatically integrated from Telemet Orion,

taking into account the performance evaluation period. Our portfolio is evaluated for the

calendar year 2012, specifically from December 30, 2011 to December 31, 2012. An

equally weighted portfolio at the beginning of 2012 could have been taken as well. The

screening was done as of February 10, 2013, and the portfolio is being back tested for

demonstration purposes. However, selecting securities at the beginning of the investment

period and evaluating the performance of the portfolio for a period following the

selection could be done as well. In fact, during the fall of 2012, when the platform was

used in a class room, students selected several securities based on value and growth

screens, bought those securities in StockTrak investment simulation software, continued

to conduct several transactions during the semester, and evaluated the performance of the

portfolio at the end of the semester. The different outputs of the portfolio are shown as

follows:

A. Attribution summary

The portfolio was evaluated for the calendar year 2012, and outperformed the benchmark

S&P 500 value index. The total relative return of 5.63% is also split into an allocation

effect of -0.68% and a selection effect of 6.31%. In addition, Total active return for each

of the GICS sectors is displayed. Telemet Orion provides wide variety of benchmarks to

choose from.

B. Performance summary

A closer view of the portfolio shows the reasons for the positive or negative active return

on company by company basis, as well as sector by sector basis. Compared to the

benchmark, the portfolio is overweighed on consumer discretionary, energy, materials,

health care, and industrials. It also performed very well on the sectors that were

overweighed. However, it was underweighted in utilities, financials, and information

technology.

C. Cumulative Performance

D. Attribution Analysis

A sector by sector break down of allocation and selection effect is also shown and

is also provided as part of the multi-style attribution output. The output shows a

superior ability to select equities in the energy and materials sector and inferior

ability to select equities in the industrials sector compared to the benchmark.

E. Subperiod Weights

Ability to see the sector weights of the portfolio across time is also very useful, especially

when securities are bought and sold throughout the investment horizon.

F. Performance Characteristics

Finally, important performance metrics such as Sharpe ratio, Treynor ratio, Information

ratio, and Tracking Error are generated as part of the multi-style attribution analysis. The

portfolio generated positive Shape as well as Treynor ratios. In addition, important

information about the portfolio: such as ROE, P/E ratio, Debt/Equity ratio, and other

fundamental information are displayed.

V. Conclusion

A simple investment process that starts with selecting securities that qualify certain

criteria, carrying out the trades using stocktrak simulation software, importing the

transactions and evaluating performance using investment platform could be carried out

by each student in a class room very easily. In this paper, a typical process that includes

screening equities on certain value based criteria using screening capability of Telemet

Orion and evaluating the performance of the portfolio using Multi-style Attribution

analysis of Telemet Orion was conducted. The platform provides wide flexibility: from

entering the formulas that could be used to screen securities to performance evaluation

that use variety of benchmarks.

References:

Blustein P. 1977. Ben Graham's Last Will and Testament. Forbes. August 1, pp. 43-45.

Damodaran, Aswath, Value Investing: Investing for Grown Ups? (April 14, 2012).

Available at SSRN: http://ssrn.com/abstract=2042657 or

http://dx.doi.org/10.2139/ssrn.2042657

Damodaran, Aswath. (June 12, 2012). Passive Value investing: Screening for bargains.

Retrieved from http://aswathdamodaran.blogspot.com/2012/06/passive-value-investing-

screening-for.html

Klerck WG and Maritz AC. 1997. A test of Graham's stock selection criteria on industrial

shares traded on the JSE. Investment Analysts Journal, 45:25-33.

Oppenheimer IH. 1984. A test of Ben Graham’s stock selection criteria. Financial

Analysts Journal. September – October, 68-74

Rea R. 1977. Remebering Benjamin Graham – teacher and friend. The Journal of

Portfolio Management, Summer. 66-77

Schadler, Fredrick and Brett Cotton. 2008. Are the AAII stock screens a useful tool for

investors? Financial Services Review, 17, pp. 185-201.