The art of investing often comes down to the science of security selection and weighting. Discretionary and systematic asset managers alike seek out excess returns through strategies that operationalize their investment philosophies with positions chosen and sized accordingly. All other things being equal, such investors normally prefer to be long names with positive underlying sentiment than the alternative. In that stead, Amenity’s NLP solutions oﬀer a diﬀerentiated approach for investors to measure and manage qualitative dimensions of the investment process. This empowers investors with new metrics to gauge exposure to untapped idiosyncrasies that can serve as additional factors in the investing process.
In this note, we pilot a method of analyzing earnings call transcripts for multiple companies to evaluate the impact of discussions by management and analysts on portfolios with diverse, unevenly distributed holdings. We aggregate company speciﬁc Amenity Scores by accounting for position size to construct an Amenity Portfolio Score. We apply the method to Berkshire Hathaway’s portfolio as a test case and detail the Oracle of Omaha’s scores on both the portfolio and holding level.
We frequently demonstrate the utility of Amenity’s NLP models by sharing our insights into the earnings calls of public companies. Analysts and investors tune into earnings calls because they are substantively focused on the health and prospects of a business. And yet, we know that objective and reliable metrics for evaluating such qualitative dimensions of the investment process are all too rare. In response to this absence, Amenity innovates a wide variety of NLP solutions that empower users with objective, material, and actionable insights into the contents of ﬁnancial text such as earnings calls.
As part of our mission to transform text into valuable assets, Amenity generates data including Amenity Scores –statistical representations of the meaning and relevancy of underlying content in earnings calls. These scores range from -100 (most negative) to +100 (most positive) and indicate the implications of discussions about business fundamentals by management and analysts. Models we employ are designed and reﬁned to capture and interpret the fundamentals that matter most to analysts and investors. As the world and our clients evolve, so too do our models. And by focusing on achieving high levels of recall and precision, we are able to deliver measurable eﬃcacy in solving real world problems.
Many insights we have shared compare company level Amenity Scores. At the same time, we recognize that analysts and investors often deal in baskets of holdings that are diversiﬁed and unevenly distributed. The drivers of investment rationales are many and varying levels of conﬁdence and capital inevitably lead to investments that are sized accordingly. This creates uneven exposures to the underlying fundamentals of holdings in any portfolio. And as a result, apples-to-apples comparisons only solve part of the puzzle.
With that in mind, we pilot a framework for aggregating Amenity Scores in a manner that takes portfolio composition into account. Our motivation is to develop methods that are relevant to the day to day lives of our clients and empower users to drill up as easily as they can drill down when interpreting our data.
We calculate an Amenity Portfolio Score for a simulated basket of equities by incorporating a mix of Amenity Scores and ﬁlings data. We use Berkshire Hathaway’s most recent 13F (14 November 2019) to generate a list of 48 holdings with their portfolio weights and match the most recent Amenity Score for each ticker. (If multiple share classes of one company are owned, we assign the same Amenity Score to both positions.) Amenity Scores are then multiplied by position size to calculate a position score that is proportional to its weight in the portfolio. Position scores are summed to create an Amenity Portfolio Score for the overall portfolio. We present results from this transformation in the Appendix.
Berkshire Hathaway’s portfolio score compares favorably to the average company in our data universe, which totals more than 12,000 companies that have reported earnings since January 2009.Across that entire dataset,the average Amenity Score per company is 12, meaning Buﬀett’s portfolio is positioned signiﬁcantly more positively than the average individual company.
Warren Buﬀett, ToddCombs, and Ted Weschler are master practitioners of the craft and the positivity of Berkshire Hathaway’s portfolio score lines up with narratives of the investment team’s prowess as stock pickers. Rather than conﬁrming what many already know, we believe our Amenity Portfolio Score further identiﬁes just how much security selection and weighting matter to portfolio managers.
Despite hordes of followers and an unrelenting focus on quality, the Berkshire Hathaway portfolio score is nowhere near the maximum of +100. In fact, one in three holdings (16 of 48) have negative Amenity Scores. However, these positions together account for only 26% of the portfolio’s market value, which limits their impact on the portfolio score accordingly. At the same time, 74% of the portfolio is invested in ﬁrms with positive Amenity Scores and the top ten holdings ranked by Amenity Score account for more than half of the portfolio’s total invested capital.
While partially a truism of portfolio management, the evidence suggests that the Berkshire Hathaway portfolio’s outperformance of the average company is driven by a tendency to (1) select securities with higher than average Amenity Scores and (2) weight holdings with higher Amenity Scores more heavily.
For example, the most recent addition to the Berkshire Hathaway portfolio is a stake in RH(RH), formerly Restoration Hardware. That company’s most recent Amenity Score was -39 (the lowest Amenity Score in the portfolio). Despite such marked negativity, the RH position creates a relatively insigniﬁcant -0.13% drag on the portfolio score as it amounts to an allocation of only 0.10% of invested capital.
Conversely, Apple Inc. (AAPL) is the largest holding in the portfolio at 28% of invested capital. Apple’s most recent Amenity Score was +56, which combined with its position size accounts for more than half of the portfolio score. The only holding with a higher Amenity Score than Apple is Visa (V) at +59, but its 1% position size provides a nominal tailwind of only +1.6% to the portfolio score.
We oﬀer illustrative visualizations to contextualize Berkshire Hathaway’s portfolio from the perspective of Amenity Scores. Table 1 details the top and bottom ﬁve holdings ranked by company Amenity Scores and attributions to the Amenity Portfolio Score. Figure 1 visualizes the portion of the portfolio score that is attributable to each position.Additional details can be found in the Appendix.
For analysts and investors that follow Berkshire Hathaway’s investments, we oﬀer a particularly valuable approach given that the company does not host its own earnings calls. To the extent that holdings are an expression of the worldview of portfolio managers, Berkshire Hathaway’s Amenity Portfolio Score may be as close a proxy as we might expect for a Warren Buﬀett earnings call.
More broadly, we believe the technique presented here oﬀers an elementary method of accounting for an important qualitative dimension of the investment process that has historically been hard to quantify.Assuming a preference for positively positioned portfolios, we hope that these sorts of metrics present deeper insights into portfolio exposures and new opportunities to set measurable targets to manage towards on a discretionary or systematic basis.
Amenity aims to augment the expertise of our clients by using innovative technology to map investment philosophy to actionable insights. We believe the types of portfolio metrics discussed in this note may be useful factors in the process of security selection and weighting, not least because they focus on diﬀerentiated data with scalable methods. The multiplicity of models we maintain allows users to think through alternative lenses like Deception and ESG, which may open the door to profound new ways to think about and act upon idiosyncratic exposures when incorporated in portfolio analytics.
In the nearer term, we will continue experimenting with this type of analysis and oﬀer regular insights into widely followed portfolios to gauge the skill of asset managers in constructing positively positioned portfolios and analyze how various positions and strategies impact Amenity Portfolio Scores.
If there is a portfolio you follow that you would like us to analyze,or if you would be interested in us scoring your holdings, please reach out at any time. As always, we welcome feedback and comments from our readers and look forward to reaching out again soon.
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Amenity Analytics is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.
This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.
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