Zephyr Associates' StyleAdvisor has been around since the early 1990s, and it's evolved with the times to be more sophisticated and more comprehensive, yet also easier to use.
When it came to market, StyleAdvisor was the first commercially available software to offer returns-based style analysis, originated by Nobel Prize economics winner William F. Sharpe. If you are an advisor who wishes to invest with active money managers, you must identify a manager's style to be able to benchmark his or her performance. You also need to understand a manager's style to create a diversified portfolio.
Returns-based analysis determines style by looking at a manager's pattern of returns over time. The theory is that if a mutual fund tracks an index or a blend of indexes over time, it is fair to assume that its style is similar to that of the index. Zephyr's software incorporates a quadratic programming package to find the index or combination of indexes that best describe a fund's style.
TAKING A TEST-DRIVE
To use StyleAdvisor to analyze a manager, you would select the New Analysis tab, click on Manager Analysis under the list of defined tasks, and click Okay. You are then asked what kind of manager to analyze (domestic equity, international equity, global fixed income, etc.). This helps the application narrow down relevant benchmarks.
The following screen prompts you to select the manager you would like to analyze. In one example, I selected the Charles Schwab Investment Management Dividend Equity managed account. I was then prompted to select a benchmark (in this case, the S&P 500), an optional universe (I selected the Zephyr large-cap core), a style basis and a cash equivalent. In most categories, the software suggested defaults, which I could override if I chose.
The final step to begin the analysis is selecting the date range and the frequency. I then clicked on the Finish button, and the applications started performing calculations. The result was about 20 pages of reports and data.
The reports cover style analysis, of course, but there is a lot more. The initial report page is just a simple depiction of performance versus the benchmark (in this case, the S&P 500), which includes a graph showing the cumulative excess return versus the S&P 500 over time.
The graph shows the portfolio versus the benchmark over various time periods. A style report includes four different style graphs. One is a single computation of the quadrant (represented by the Russell 1000 Growth/Value and the Russell 2000 Growth/Value selected during the setup) that this strategy falls into. In this case, it falls almost squarely in the center of the Russell 1000 Value quadrant. It is no surprise then that when we view the composition, or asset allocation graph, the style of this fund is a blend of 90.4% Russell 1000 value and 9.6% the Citigroup three-month T-bill index.
Just about every imaginable detail an advisor would want when analyzing a money manager is here, including quarterly returns, correlation matrix, annualized excess returns/standard deviation of excess returns and manager performance versus the appropriate universe of managers. There are also some graphs and charts that help analyze the impact of a bear market.
CUSTOMIZING THE REPORT
The default report set includes a wealth of information, but this is only the tip of the iceberg. There is a great deal of additional functionality that allows users to customize the analysis to their exact needs. For example, in the initial performance chart, there is a graph of cumulative excess return versus the market benchmark. With a couple of clicks, the graph can be altered to display relative cumulative return versus the style benchmark.
You can also add or remove pages from a report template. For example, if you want to keep the report to 10 pages, you can simply delete the pages you do not want. You can add pages in a number of ways. One way is to copy an existing page and then alter the existing data using right-click functionality. Another way is to add a blank page and then use the Gallery, a selection of preformatted charts and graphs, to populate the page. If you use the tool to divide a page into two or four sections and then drop a preformatted chart or graph into a page section, it will format itself automatically to the selected space. If you decide you want to use a different graph, you just drag and drop it onto the existing one, and it will replace the previous one. After you've positioned your chart or graph templates, you can right click to select the data that you want to include in the chart.
The ability to format an individual page can be used in many different ways. One popular use is to create a single summary page for a managed account or a mutual fund by selecting four graphs and charts from the gallery, customizing them, creating a custom title for the report and using it internally or with clients.
Thus far, our talk of customization has been limited to a single Zephyr defined task, the creation of a manager analysis workbook. My copy of StyleAdvisor came with about 50 Zephyr-defined tasks to start with, and users can define and save their own custom-defined tasks once they get familiar with the application.
A COMPLETION PORTFOLIO
Consider another Zephyr-defined task that is straightforward and generates a two-page report: creating a completion portfolio. Using the Schwab managed account, picture a scenario in which half of a client's wealth is in the managed account. You want to allocate the rest of the client's funds so that the total portfolio tracks the Russell 3000 as closely as possible.
From the task list, select Build a Completion Fund, then specify the fund you want to build the completion fund around, as well as the benchmark you'd like the resulting portfolio to track. The application suggests that you build the completion portfolio using other Russell indexes and a cash equivalent fund. On the next screen, you select the date range for the style analysis, the frequency, the number of trailing quarters and the percentage of the total portfolio allocated to the completion fund (50% in this example). After running the analysis, you see that you need to invest 68.2% of the available funds in Russell Growth and 31.4% in Russell 2000 Growth. Doing so will give you a portfolio that should be, according to the software, 99.2% R-Squared with the Russell 3000.
HOW IT STACKS UP
Although we've highlighted only a small fraction of what StyleAdvisor can do, its depth and breadth are impressive. The application will be helpful, if not essential, for advisory firms that deal with retirement plans, foundations and endowments, as well as firms that run their own pooled products. In the institutional marketplace, the type of analysis that StyleAdvisor provides is a necessity.
As for the rest of the advisor community, StyleAdvisor is a nice addition to the toolkit, but it may not be essential. One impediment is price. A single user StyleAdvisor license starts at $8,000. That includes the separately managed account database and the database of indexes. Other databases cost extra. For example, Zephyr offers two mutual fund databases. Morningstar data costs $500 annually for a single user; Lipper data costs $300 annually.
While StyleAdvisor has come a long way technologically, there is still room for improvement. At these prices, I would expect to be able to access my data any time, anywhere, from any device. That does not appear to be the case. Yes, you can output a report to a PDF file and store it yourself in the cloud or you can export data to other applications, but a true mobile solution is not included.
Zephyr StyleAdvisor is a proven product, and many advisory firms would benefit from using it. The price is perhaps the greatest impediment to increased sales to advisors, with the lack of a true cloud solution a close second. If Zephyr can figure out how to repackage a subset of its existing features in an affordable cloud version for advisors, it should attract a larger advisor following.
Joel Bruckenstein is a Financial Planning editor-at-large and co-creator of the Technology Tools for Today newsletter and conference series. He is also president of Global Financial Advisors in Miramar, Fla. For more information, visit JoelBruckenstein.com.