You'll notice that we've changed the label we use to name the rebalance method on popularity clones (ONLY) from "Equal Weighted" to "Popularity Weighted".
The actual calculation method has not changed but we think the new label more accurately reflects how we're rebalancing popularity clones. Our Equal Weighted method is simple to understand when cloning a single manager - if you are cloning the manager's top 10 holdings then there are ten holdings in the clone and each holding gets a 10% weight. It get's a little more involved when you are cloning groups of managers because there is the chance that more than one manager holds the same security. There are two options in terms of applying weights when this happens; Option A) count overlapping securities only once or Option B) treat every instance of a security as a unique holding. Below is a table that illustrates the difference between the two options. It assumes a Top 3 Holdings Clone on a fund group made up of two funds:
|
Stock |
Holder |
Option A |
Option B |
|
MA |
Manager 1 |
20% |
17% |
|
V |
Manager 1 |
20% |
17% |
|
BAC |
Manager 1 |
20% |
17% |
|
AAPL |
Manager 2 |
20% |
17% |
|
MA |
Manager 2 |
ignore |
17% |
|
AMT |
Manager 2 |
20% |
17% |
|
Total |
100% |
100% |
Which option is more "equal weighted"? The answer is that it is subjective. Option A is certainly equal weighted but it ignores Manger 2's decision to make MA his/her second largest holding. Rather than do that we chose to treat all holdings from each manager as unique and apply our weighting on that basis (i.e Option B). I guess we could call it "Equal Weighted With Popularity Bias". Ideally it would be good to implement both options so members can compare both methods. That is certainly on our road map.
The "equal weighted" discussion takes on yet another wrinkle when looking at "Popularity" clones. In these clones the likelihood that there is overlap in a particular security is 100%. In fact that is the very definition of popularity, the more overlap in a holding amongst managers the more popular it is. Just like in the above example, you can choose to either ignore the overlaps or not when weighting the portfolio. Here's an example:
|
Stock |
No of Hldrs |
Option A |
Option B |
|
MA |
10 |
20% |
28% |
|
V |
8 |
20% |
22% |
|
BAC |
6 |
20% |
17% |
|
AAPL |
7 |
20% |
19% |
|
AMT |
5 |
20% |
14% |
|
|
Total |
100% |
100% |
Wanting to stay consistent - we again chose Option B which does not ignore the overlap in holdings. Except that because popularity is the sole characteristic used to apply the weights it is not really accurate to call this method "Equal Weighted" any more, hence the change in label to "Popularity Weighted".
We always strive to be very meticulous in crafting our glossary definitions and FAQ explanations so that members understand exactly how we're performing our calculations. We decided that changing this label now made sense because it is more accurate and descriptive. Ultimately once we deploy both weighting methods above (soon) - Option A will likely be called "Equal Weighted" and Option B "Popularity Weighted" for all fund group clones. As always, we're open to your feedback.
As further help in understanding how we're weighting clones, I'm including the definition of each method taken from our Glossary:
Equal Weighted
A portfolio weighting method where the performance of each holding in a clone is given the same weight as any other holding in the clone (e.g., a clone with 10 holdings allocates 10% weight to the performance of each holding). For "Top Holding" and "Best Ideas" clones in a fund group, if there are multiple instances of the same security in a portfolio, we treat each instance as a separate holding.
Match the Manager
A portfolio weighting method where the performance of each holding in a clone is given a weight that is equal to the disclosed market value of that holding at the most recent quarter end divided by the total market value for all holdings in that clone.
Popularity Weighted
A portfolio weighting method where each clone holding is weighted based on how popular the holding is amongst the group. For example, a security which is held by 10 funds will have twice the weight as a security held by 5 funds. This weighting method applies to popularity clones only
