Heatmaps allow you to pinpoint which individual holdings have the greatest relative impact on the portfolio. Heatmaps include four separate views: The Risk/Reward Heatmap, Tax Drag, Expense Ratio, and Annual Dividends.
In this article:
The Risk/Reward Heatmap
The Risk/Reward Heatmap quickly shows you the relative risk and reward that investment choices are adding to the portfolio, including the accounts you’re viewing, and is also a great way to quickly glance at the underlying data Nitrogen is using to produce the overall risk analytics.
By selecting the Risk/Reward Heatmap view, you can see a visual representation of the potential risk (red bar), potential return (green bar) and the amount of risk that is diversified out by inverse correlations (gold bar), given the data model selected.
- Green bar (REWARD): Potential positive return for this investment, in proportion to its allocation within this portfolio.
- Red bar (RISK): Potential negative return for this investment, in proportion to its allocation within this portfolio.
- Gold bar (DIVERSIFIED RISK): The amount of risk that has been diversified away for this investment, calculated from anti-correlations with the other holdings in the portfolio.
This is one of the most powerful ways to illustrate the effects of diversification to clients in a way they can see and understand.
- The total risk (diversified and undiversified risk) of the investment is represented by Red bar + Gold bar.
- The greater the length of gold bars, the lower the overall Risk Number will be.
- If you have selected a custom Market Assumption, for example, +1% increase in interest rates, the heatmap view will absolutely reflect the updated risk and reward scenarios for each of the affected securities.
Tax Drag is the reduction of a portfolio’s annualized return due to the taxes stemming from income-producing securities. In this article, we’ll examine how Nitrogen calculates Tax Drag for securities and portfolios.
By selecting the Tax Drag heatmap, you can now explain which holdings are contributing to the overall drag on the portfolio, or shed some light on the bright side of an underperformed.
You can learn more about the Tax Drag calculation here.
Expense Ratios and Annual Dividends
Nitrogen incorporates the trailing twelve months (TTM) of regular dividends for the annual dividend. Principal distributions and other unique, one-time events are removed from the calculation so as to not overstate the normal dividend yield.
In the same manner, expense ratios are calculated by using the trailing twelve months (TTM) of expenses.
To see the dividend or expense ratios across a portfolio, click on the relevant heatmap at the top of the portfolio.
Learn more about expense ratios and annual dividends here.