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FAQ | Floodlight Investing
 

FAQ

Common questions, explanations and technical specifications of the service.

 

Questions around Floodlight as a service

How can Floodlight help me do business better?

Why should I choose Floodlight? What makes Floodlight unique?

What specific features does Floodlight offer?

How does Floodlight build customized portfolios?

Why should I use an asset allocation-driven approach to investing?

Questions around service applicability

Does Floodlight support my currency?

Does it matter where I live?

Questions around technical specifications and modelling assumptions

What financial techniques and mathematical models does Floodlight employ?

How does Floodlight define the Efficient Frontier?

How does Floodlight develop Capital Market Assumptions? Can I specify my own?

What financial assumptions are made by Floodlight?

How many asset classes are available? What indices are used to proxy asset class performance?

Over what period of time does the historical performance data cover?

What currencies are supported by Floodlight?

How big is Floodlight’s fund database, and what fund information does it keep?

Questions around conflicts of interest, investment advice and independence

Does Floodlight provide investment advice, or recommend funds and products?

Does Floodlight help me choose funds to recommend or invest in?

Does Floodlight make any money from funds?

Can I buy and sell funds through Floodlight?

 

Questions around Floodlight as a service

How can Floodlight help me do business better?

Floodlight is built with these goals in mind:

  • Help advisers build better portfolios for their clients. A firm belief of ours is that portfolios that are customized to individuals’ unique needs are more likely to achieve their goals and objectives.
  • Help advisers communicate more effectively with clients. Through the use of one-click reports that communicate advanced topics clearly and simply, advisers are able to have more meaningful conversations with their clients that should increase the client’s confidence and the strength of the relationship.
  • Help advisers expand their client base and build business. Floodlight is a unique service offering that enables advisers to serve and interact with clients in a way not possible using other services.

 

Why should I choose Floodlight? What makes Floodlight unique?

We’ve never been fans of hiding behind marketing talk and vague statements. Here’s why we think we’re a unique service and what makes us stand out from the crowd:

  • Our approach to portfolio construction is based on an asset allocation that is customized to the individual’s unique needs and objectives. (See below on why this is just a no-brainer for us.) We think that selling funds and products is secondary to determining the right asset allocation, but this is what our competitors seem to be focused on.
  • Our approach is focused on detailed analysis of the asset allocation, allowing for iterative refinement and tweaking. Our analysis modules take both historical and forward-looking perspectives, and include features such as stress testing, scenario analyses, Value at Risk assessments, beta and correlation analyses, factor model regressions, and much more. Finally, side-by-side comparisons of asset allocations allow easy performance visualization and understanding of trade-offs.
  • We allow you to do things in the simplest way possible, and don’t require you to have advanced financial knowledge. The service is designed around a simple and user-friendly interface. You can work with Floodlight using goal-based tasks, focusing only on what matters to you. You can use as much or as little of the service as you’d like – start lite, and use additional modules as your comfort level grows. Every step of the way, we’ll provide help, insights, commentary and help you interpret the results.
  • You can allow interested clients to log in to a simplified version of Floodlight themselves, involving them in the portfolio construction process. We think we’re witnessing an historic shift in attitude amongst clients towards their desired involvement in their financial planning: Increasingly, clients want to know more, understand better, and actively participate in their risk-assessment and the portfolio construction process. With Floodlight, you can allow interested clients to have their own logins to the service, which will allow them to see a controlled and stripped-down version of the app. This ability is absolutely unique among our competitors, and it will allow you to evolve your service with the expectations of your clientele.
  • The Floodlight service is entirely web-based, not requiring any downloads and benefitting from seamless data and software updates. You won’t have to perform any installations, download patches, or spend time on the phone with IT. This seems to obvious and natural to us, but the vast majority of services out there are still being delivered in the traditional way – a CD-ROM in a box.
  • We’re far cheaper than any other similar service. Most competitors are charging over $300 / month; we charge between $99 and $149 / month, depending on the number of licenses you require.

What specific features does Floodlight offer?

We don’t like the idea of simply listing our features – we think that the value of any service is measured mostly in how effectively and simply it solves real problems and adds value to its users.

That said, we’re confident that we can match up to even the most sophisticated and expensive services out there in functionality and features. Here are the most frequently used:

Features to assist in the construction of an asset allocation:

  • Questionnaire to assist in assessing risk and return profile
  • Mean-variance based Efficient Frontiers for asset allocation construction
  • Mean-variance based Efficient Frontiers for allocation improvement
  • Pre-built Model Allocations for comparison

Features to assist in analyzing an asset allocation and comparing multiple allocations:

  • Historical performance analysis
  • Projected performance analysis
  • Goal-based analysis
  • Stress test analysis
  • Sensitivity analysis
  • What if? Scenario analysis
  • Risk and return decompositions
  • Factor regression analysis
  • Assumption sensitivity analysis

Features to assist in understanding the effects of investing decisions:

  • The effect of investment horizon on performance
  • The effect of saving on performance
  • The effect of spending on performance
  • The effect of leverage on performance

Features to assist in fund selection:

  • Pre-built fund templates for quick solutions
  • Advanced filters to narrow-down the fund universe to an appropriate subset

Features to assist in communication with clients:

  • Customizable reports, exportable in Adobe pdf and Microsoft Excel
  • The ability to allow clients to login to Floodlight (using a simplified version of the service) so that they can participate in the portfolio construction process

 

How does Floodlight build customized portfolios?

We believe that portfolios should be built on the basis of long-term asset allocations that are customized to individuals’ unique needs.

We also believe that thorough analysis and understanding of the portfolio is essential for long-term investing success. By examining how a potential portfolio would have performed in the past and how it might perform in the future, you’ll be in a better position to tweak the portfolio so that it’s optimally suited to your clients’ needs, and so that it’s got a better chance of helping them achieve their goals.

And, we believe that by helping your clients develop realistic expectations and a rational understanding of how their portfolios should perform, they’ll be in a better position to stay the course with confidence, through the inevitable market cycles.

 

Why should I use an asset allocation-driven approach to investing?

Time after time, studies have shown that a portfolio’s asset allocation determines over 95% of the portfolio’s risk, and explains over 95% of the portfolio’s return. (See Brinson, Hood and Beebower for more.)

What does this mean? Well, if you used an approach to investing that favored active management and fund selection over asset allocation, for example, you would be focusing your efforts on an aspect of portfolio construction that has negligible impact on overall performance. If asset allocation decisions are going to dominate the performance of your portfolio, it’s clearly best to prioritize it above all else.

Floodlight includes 19 asset classes, across equity, fixed income (bonds) and alternative investments.

 

Questions around service applicability

Does Floodlight support my currency?

Floodlight has support for three currencies – the Euro, US Dollar and UK Pound Sterling.

You are able to select the currency for each of your clients separately, which is absolutely necessary if you have a diversified client base.
If you use a currency that’s not either of the three listed above, you can still use the service, but will have to perform the portfolio construction process and various analyses using one of these currencies.

 

Does it matter where I live?

Floodlight is available to everybody, regardless of where you live.

That said, while investing is becoming an increasingly global activity, you may have specific local conditions that impact your approach to investing. For example, your country of residence may affect the ability to trade in certain products (e.g. owning products offshore) and impact the kind of portfolio you might build.

We have focused on serving advisers based in three regions – the US, UK and the EU. This doesn’t mean you can’t use the service if you’re from countries outside of these regions, but our ability to help you select funds will be restricted. This aspect of the service is, however, only a small component of the overall service.

Please note that the tax implications (e.g. income and / or capital gains taxes) are not taken into account in Floodlight. Furthermore, note that you should always consider investigating any results or solutions that you obtain using Floodlight yourself, possibly with the assistance of a lawyer, accountant or tax expert.

 

Questions around technical specifications and modelling assumptions

What financial techniques and mathematical models does Floodlight employ?

Floodlight uses the full power or many financial models and modeling techniques that are proven to work well. Some of the models and techniques we use are mean-variance optimization, efficient frontiers, Monte Carlo analysis, Value at Risk and stress tests, to name a few.

We’re also the first to admit that some models have limitations and are based on assumptions, which is why we incorporate many different approaches to determine the most robust and reliable solution. We’ve also we’ve built an entire module that focuses on assessing the validity of the common assumptions that are used by many modeling techniques – please see the question “What financial assumptions are made by Floodlight?” for more information.

And remember, this all happens 'under the hood' - all you'll see is a simple process through a well-designed interface that hides all the complexity.

 

How does Floodlight define the Efficient Frontier?

The Efficient Frontier is calculated using constrained mean-variance optimization based on Floodlight’s Capital Market Assumptions. The Efficient Frontier is a multi-step Efficient Frontier which provides the best indication of the type of performance that an investor might actually achieve over the long-term. (Technically, what this means is that the returns shown are geometric returns, as opposed to arithmetic returns which are upwardly-biased estimates of actual, realizable performance.)

Constraints were put on the weights to both individual asset classes and groups of asset classes to produce results that are robust and that recognize a degree of uncertainty in the Capital Market Assumptions in forecasting future market performance.

For each currency, there are two efficient frontiers that are made available to you: one that includes alternative investments, and one that excludes alternative investments (using only equity and fixed income).

 

How does Floodlight develop its Capital Market Assumptions? Can I define my own?

The Capital Market Assumptions (CMA) used by Floodlight are updated annually, at the beginning of every year. In determining the assumptions, we use historical data covering the period Jan 1990 to the end of the previous year; the current '2010 assumptions' use data through December 2009 (covering a period of 20 years).

Our expected return assumptions are calculated using the CAPM model*. The CAPM model is a one-factor 'equilibrium' model that assumes that an asset's expected return is proportional to its sensitivity to non-diversifiable market risk. The assumptions for asset class expected volatility and the correlation matrix are calculated using unadjusted historical numbers over the above period.

To see a full specification of Floodlight's Capital Market Assumptions, click here.

* In applying the CAPM model, we use a market risk premium of 4% and the risk-free rate of 4%. The asset class betas are calculated over the historical period stated above to the market portfolio which is defined as 35% World Equity, 35% Diversified Bonds, 20% Balanced Absolute Return and 10% Commodities.

These are the default Capital Market Assumptions in Floodlight – you can easily override these and define your own. However, please note that the Efficient Frontiers have been optimized for the default Capital Market Assumptions; if you modify these, the Efficient Frontiers will no longer be entirely optimal.

 

What modelling assumptions are made by Floodlight?

Even the best financial models and techniques are based on assumptions. Here are some of the most common:

  • That returns follow a normal distribution.
  • That correlations among investments or asset classes are constant.
  • That the volatility of investments or asset classes is constant.

We all now know, having witnessed a few bubbles-and-busts over just the last decade, that some of these assumptions are tenuous at times. More than ever, it’s important to understand what assumptions are being used, and how they might fail.

For this very reason, we’ve built an entire module that focuses on assessing the validity of the common assumptions that are used by many modeling techniques. Using this feature, you can test how the predicted results might change if these assumptions fail catastrophically. For example, the module addresses each of the major assumptions outlined above:

  • Returns distributions often exhibit ‘left-tails’. How would this change the predicted results?
  • Correlations usually spike during crises. How would this affect portfolio construction?
  • Volatility fluctuates over time, sometimes staying low for a long time (like over the period 2003 – 2007) and sometimes remaining at elevated levels (like over the period (2008 – 2009). How should I incorporate this reality into financial planning?

By being able to test the validity of common modeling assumptions, and estimate the results if these assumptions were to completely break-down, you can know how much confidence to assign to the results, cover all bases and confound any critics.

 

What asset classes are available? What indices are used to proxy asset class performance?

Floodlight has 19 asset classes, covering Equity, Fixed Income and Alternative Investments.

In order to gauge the performance of any asset class, it needs to be 'proxied' (in other words 'approximated and represented') by an appropriate index.

The full list of asset classes that are available, including the name of the index that is used to proxy each asset class, is shown below.

Floodlight asset classes

 

Over what period of time does the historical performance data cover?

Floodlight has historical performance data beginning in January 1990 for all asset classes. Data is updated monthly.

With over 20 years of performance information, which include many market cycles and a few too many bubbles-and-busts, Floodlight benefits from a rich and varied environment to view and analyze historical performance.

 

What currencies are supported by Floodlight?

Floodlight has support for three currencies – the Euro, US Dollar and UK Pound Sterling.

You are able to select the currency for each of your clients separately, which is absolutely necessary if you have a diversified client base.

If you use a currency that’s not either of the three listed above, you can still use the service, but will have to perform the portfolio construction process and various analyses using one of these currencies.

 

How big is Floodlight's fund database, and what information does it keep?

Floodlight has a database of over 10,000 funds, covering 19 asset classes across Equity, Alternatives and Fixed Income.

Floodlight maintains the following fields of data for each fund: Asset class focus, geographic focus, currency of denomination, country of domicile and domicile type, total fund assets, minimum investment amount (bite size), and various fee information (front end load, back end load, management fee and expense ratio). These fields may vary from asset class to asset class, depending on applicability. Floodlight does not maintain fund performance data.

 

Questions around conflicts of interest, investment advice and independence

Does Floodlight provide investment advice, or recommend funds and products?

Floodlight does not provide any investment advice or product recommendations.

The Floodlight service attempts to provide you with a service that reflects an approach to understanding the investment environment and a means of constructing an investment portfolio. It does not purport to be the only or best way of doing either function.

Additionally, the product and fund results obtained through using the service do not constitute investment recommendations. They are the results obtained after applying a number of filters that filter a fund database based on your unique circumstances and considerations. Recommending or investing in any portfolio is ultimately a decision that you need to take on your own.

 

Does Floodlight help me choose funds to recommend or invest in?

Floodlight has a very large database of approximately 10,000 funds. Part of the Floodlight service is to help you choose funds that you can use to invest your clients’ portfolios.

You can play as involved a role as you’d like in the fund selection task. We’ve got what we call ‘fund palettes’ that allow you to arrive at a set of potential funds in just a few clicks. This is great for those who are firm believers in the power of asset allocation and who don’t want to spend much time on fund selection.

Alternatively, you can tap into our fund database and fully control the fund selection process, based on whatever criteria you’d like. This would work well for those who’ve got knowledge on the universe of funds and the fund selection process. Here, too, we’ve also made available a few filters that’ll help narrow the range down to a subset of eligible funds quickly.

However, whichever approach you choose to use – the ‘quick solution’ approach using pre-built fund palettes, or the detailed approach that is fully under your control – the role of Floodlight is to apply a set of mechanistic filters to narrow down a large database of funds to a smaller set that you should focus your attention on. For example, we have filters that ensure that the funds you see are appropriate to your currency, to your country of residence, to your unique asset allocation, and that ensure that the funds are available to you based on the amount of money you’re probably looking to invest in them.

 

Does Floodlight make any money from funds?

Floodlight does not make any money, either directly or indirectly, in any way, from any of the products, funds or securities in our database or shown through the service.

Through the service we have simply provided a mechanistic way of finding some of any number of appropriate products and funds that appropriately represent the ownership of an asset class.

 

Can I buy and sell funds through Floodlight?

Floodlight is not a trading platform. One day we might choose to offer the functionality to purchase market instruments more directly, but for now you cannot trade through Floodlight.

We have specifically chosen to focus on helping you build portfolios and understand all aspects related to that. By remembering why we’re here and why we started Floodlight we hope to excel in doing just that. And, frankly, it’s by far the most important part of investing, and a big enough job as it is!