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Duration: 10:55

Instructor:

Contributor: Interactive Brokers

Level: Advanced

This lesson helps users understand the TWS Portfolio Builder tool. Imagine if you could design a portfolio that bought the top ranked stocks by pretax margin, PE or ROI and sold the 10 stocks with the lowest rankings. What might the results look like over a one, two or three-year period? And how did the basket perform against the S&P 500 index? And how about versus the Nasdaq composite or Russell small cap index?

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Study Notes:

This lesson looks at testing your own ideas in order to customize an investment strategy. For this I will
put the Portfolio Builder tool through its paces. Access this powerful tool via the Mosaic interface from
the blue New Window button and locate the Portfolio Builder button in the Trade section. It can be
opened as a standalone window by clicking on the left tab, or it can be added as a Mosaic page by
clicking the right tab.

The Portfolio Builder enables users to build a strategy drawing upon a universe of stocks and by
selecting from more than 60 financial criteria to include or exclude companies that meet your filters.
Plus, users may incorporate the stock ratings of 11 highly-regarded research providers in order to devise
a long/short portfolio of names to invest in. Use a variety of financial criteria to help select a portfolio of
stocks. Then, review the performance of your models over time, compare to common benchmarks and
even optimize the conditions.

You may save your models in the Library for anytime access and you can invest at the click of a button
when you have tailored your strategy. The Portfolio Builder can be configured to automatically notify
you when it is time to rebalance the portfolio, making it easy for users to monitor and manage multiple
portfolios over time.

Upon opening the Portfolio builder you can see three steps. Choose between creating a new strategy or
select from the Predefined Strategies in the Library displayed in the sidecar to the right. Second,
configure your investment rules. I’ll demonstrate that in this lesson. And finally, when you are satisfied
with your portfolio, you may choose to invest in it.

In order to demonstrate the power of the technology, I will choose from one of the several Predefined
Strategies displayed in the Library. Hover above each strategy to display a popup description of each.
This shows the investing premise behind the construct of the portfolio. It explains what criteria are used
and how the universe is ranked for selection, including the use of analyst rankings. And it tells us how
many stocks the portfolio invests in as well as the ratio of long positions to short positions.

Think of the bulleted list as a set of variables. Later you will see that by adjusting the value of a variable,
the results change. In the Closely Held portfolio, for example, users might loosen or tighten the long-term debt-to-equity metric from its default level of 50. Or the insider ownership level could be moved to
higher or lower than 20%. Or users could reduce the universe to select from by raising the minimum
price of $1.00 to see how this affects portfolio returns over a specified period.

I will click on this portfolio in the Predefined list and look at the existing portfolio. There are four
windows on display. The lower window shows the Composition Details of the portfolio. The Long
Positions and the Short Positions can be contracted by clicking on the plus sign to the left. With the
display contracted you can see the Weightings listed to the right. The Target value displays 130% for
long and negative 50% for shorts. If this account was invested, the column to the left would display the
live Current weighting of each stock held long or short. I’ll expand the Position lists again. Now you can
see the holdings and you can read across the columns how the portfolio is displayed. The column
headers are specific to this portfolio and will change according to the chosen criteria.

Each ticker symbol displays an icon to its right indicating that this ticker is now associated with an
investment strategy. You can also see an Industry column. Industries comprise broad economic sectors,
and if you look to the upper right window this is displayed in a color-coded stack chart. Hover the cursor
above any sector to see the percentage value allocated to long AND short positions by industry. In this
specific case, hovering above the Industrial sector reveals that there are ONLY short positions allocated
to this sector. Most other sectors combine both long and short positions.

To the left are two windows displaying performance detail. The Strategy Performance lists Total and
Annual Returns, Portfolio Volatility and Drawdown values. It also calculates the Sharpe ratio, which is a
measure of risk used by investment managers. The display can be shown in percentage terms or dollar
values. The dollar amount is set when editing the investment rules. The overall strategy results are
shown in Yellow and broken out by Long and Short values in white. The default SPY benchmark is
displayed in Orange to the right for you to contrast performance of a set of stocks.

The default period is two years and the performance over time is displayed in the Performance Chart.
Again, this will show dollars or percentage and is controlled by the toggle in the Strategy Performance
window. Use the checkmark to remove or add the Strategy or its benchmark to the display.

There are several buttons above the display. The Invest and Divest buttons in green and red allow you to
enter and exit the strategy. In this case the Divest button is gray because the account is not yet invested.
The Rebalance button will display when it is time to do so. The frequency is set by the user at the time
the portfolio is constructed. The first button allows users to Edit Rules. Let’s click here and discuss the
criteria behind the portfolio.

The Name input field allows users to give a new title to a portfolio and make it available from the
Library. The interface is intuitive and easy to use. If you want more information on one of the selections,
hover above the Information icon to display in a popup window. Note the scroll bar to the right and
review all of the selections. At the very bottom is the Backtest Settings input area. This enables users to
change the time frame for portfolio performance as well as to select a different benchmark. Click on
each dropdown arrow to make another selection. Also there are choices available to optimize holding
sizes in the final dropdown menu. Any changes to any field will immediately be reflected in the portfolio
performance to the left.

For example, if I change the Backtest period to three years, the Performance data and chart adjust. If I
adjust the Benchmark selection to any other index, the Performance reflects the change. Just above you
can change the default number of holdings for both long and short positions. For example, let’s see
what the performance of 20 long stocks and five short stocks is over three years. The returns may be
higher, but the Maximum Drawdown was also higher. That means that open losses were deeper when
adding more longs and reducing the number of shorts. It’s important to look at all of the data and not
just the return.

If I scroll back up to the top of the Investment Rules you will see that I can enter a dollar Investment
Amount. And I can alter the long or short leverage. If I wanted to only hold long positions and set the
Short Leverage value to zero, I must also remember to scroll down the page and change the short
position holdings to zero. Once again, the Performance details update in the Portfolio Builder.

Clicking on the Sector/Industry button enables the user to determine whether to invest in a specific
sector or whether to exclude it. And users can also set investing limits according to sector by longs or
shorts.

In the investing Universe selection, you can see that this portfolio draws from ALL available stocks and
that stock prices may range from $1.00 to $293,000. Again, by changing the price criteria, the Portfolio
Performance will change. Likewise, users can also use the Index Filter to contrast the performance of
this criteria when applied to a specific index. I’ll click on SPX and remember to compare the performance
to the SPY index. You may notice that despite selecting the top 10 and bottom 10 equities, fewer results
are included in a portfolio. Consider carefully the criteria you are using and whether they are best suited
to small or large companies.

This portfolio was built using just two financial criteria. To locate and add more, use the Add Additional
Filters dropdown menu and use the expand button next to any of the nine groupings. For example, if I
expand the Dividend group, there is a single selection for the 12-month trailing dividend yield. Selecting
this adds it to the list. Simply add a range to the input fields. The higher the mi nimum value I select, the
smaller is my universe and you can see the impact on the Strategy Performance.

The Investment Strategy incorporates the stock ratings of 11 research providers listed in this section.
You can include or exclude certain providers by checking the box to the left. And you can assign greater
weight towards the views of one provider over another by using the toggle bar. The ranking in the
universe that you are selecting from can be set according to these weighted analyst ratings from the
dropdown menu. You can select by Market Cap or build a custom methodology by selecting from the
dropdown menu. By selecting Market Cap, I get one result. However, if I remove the dividend selection I
get another result.

As you can see, there are many, many combinations that could be built to test your investment
hypothesis. In this lesson, we didn’t adjust much, but got a lot of different answers even though the
predefined portfolio was based upon a small number of criteria. Try testing some of those Predefined
Strategies and adjust the universe construct, the benchmark comparisons and then the rigidity of the
criteria. When you have become comfortable with the tool, try building some portfolios of your own.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

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