AdFi Score: Complete UIT due diligence as a service
The AdFi Score™ from Advis Network is a transparent and objective rating system used to evaluate unit investment trusts. It assists financial professionals in demonstrating a prudent investment selection and allows a monitoring process of UIT strategies in a fashion that all clients can easily understand.
What is the AdFi Score?
The AdFi Score is an investment rating system that helps quickly identity specific UIT strategies that may merit continued research and analysis. It also simplifies the ongoing monitoring process by highlighting strategies that show potential deficiencies.
The score evaluates UIT strategies on different criteria across a spectrum of quantitative data points to determine a minimum fiduciary standard of attention is being endured. The criteria consist of:
- Regulatory oversight,
- Track record,
- Expense ratio/fees relative to peers,
- Risk-adjusted performance relative to peers, and
- Performance relative to peers.
The score is a valuable tool for investment decision-makers to identify and monitor UITs as a part of their due diligence process. It represents an objective means of evaluating UIT strategies according to set criteria. It is not intended, nor should it be used as, the only source of information for reaching an investment decision.
Calculating the AdFi Score
The AdFi Score is a peer percent ranking of a UIT strategy against a set of quantitative due diligence criteria selected to exhibit prudent fiduciary management. The score is calculated on a daily basis for UITs using composite performance, brokerage expenses, and reinvested dividends. Only UIT strategies with a one-year history receive a score.
Calculation Process
- Each strategy is evaluated against a set of factors and thresholds.
- If a strategy fails one of the factors or thresholds, points are allotted.
- Next, the points are totaled and the total for each strategy is ordered from lowest to highest within each peer group.
- Finally, each strategy is given a percentile ranking based on its placement in the distribution of its peer group.
Strategies with 0 allotted points are automatically given an AdFi Score of 0. Every other strategy is then given a score of 1 to 100, representing its percent ranking based on its placement in the distribution of its peer group.
Overall Score
The AdFi Score is presented using a "speedometer" graphic, with 0 being the highest possible score, and 100 being the lowest possible score.
Using each colored percentile, the score provides a quick assessment of the strategy and any due diligence shortfalls that may affect whether the UIT is appropriate in certain contexts.
Score: 0
No fiduciary due diligence shortfalls.
Score: 1-25
The UIT may be an appropriate choice for use in a fiduciary account.
Score: 26-50
The UIT has noteworthy shortfalls. It may not be an appropriate choice if being considered in a search. However, if already in use, the UIT may not need to be replaced if mitigating circumstances are present.
Score: 51-75
The UIT has considerable shortfalls. It may not be an appropriate choice if being considered in a search. However, if already in use, the UIT may not need to be replaced pending further investigation.
Score: 76-90
The UIT has considerable shortfalls. It may not be an appropriate choice if being considered in a search. However, if already in use, the UIT may not need to be replaced pending further investigation or if the score improves in subsequent time periods.
Score: 91-100
The UIT has significant shortfalls and may not be appropriate for use in a fiduciary account. Strongly consider replacing the UIT if already in use.
AdFi Score Criteria
The following factors and thresholds are used in the AdFi Score calculation:
Regulatory Oversight
The UIT must be a U.S. Registered Investment company and regulated by The Investment Company Act of 1940.
Minimum Track Record
The UIT strategy must have at least a one year history to be scored. Strategies with less than a one year history are excluded from score and peer group calculations.
Expense Ratios/Fees Relative to Peers
The rating uses the total annualized sales charges and operating expenses. 15 points are allotted if the total annualized sales charges and operating expenses are in the 4th quartile of the trust's peer group.
Risk-adjusted Performance Relative to Peers
The UIT strategy risk-adjusted composite performance, calculated using the Sharpe ratio and alpha, should be above the peer group median's risk-adjusted performance.
Five points are allotted if the risk-adjusted performance is in the 3rd quartile of the trust's peer group. Ten points are allotted if the performance is in the 4th quartile of the peer group.
If the strategy does not have enough history for 3- or 5-year risk-adjusted performance, the 1-year or 3-year percentile is used in its place (respectively).
Performance Relative to Peers
The UIT strategy composite performance should be above the peer group's median return for 1-, 3-, and 5-year cumulative periods.
- 1-Year: 5 points allotted if in the 3rd quartile, 1- points if in the 4th quartile.
- 3-Year: 10 points allotted if in the 3rd quartile, 15 points if in the 4th quartile.
- 5-Year: 15 points allotted if in the 3rd quartile, 20 points if in the 4th quartile.
If the strategy does not have enough history for 3- or 5-year cumulative performance, the 1-year or 3-year percentile is used in its place.