by Joe Lan, CFA

Portfolio management software programs are one of the tools most widely used by individual investors. As an investors personal portfolio grows over the years, it often encompasses several investment accounts, including 401(k)s, IRAs, brokerage accounts and savings accounts. Tracking all these accounts accurately is an arduous task, and many investors need help. Luckily, the continuing development of technology has led to increasingly powerful portfolio management software aimed at providing just that.

In this issues Comparison, we examine three portfolio management software programsQuicken Premier 2011, Investment Account Manager Version 2 and Fund Manager 11. These three software programs have each made appearances in our previous Comparison articles. They continue to be updated and improved, and we believe they still represent the best portfolio management software programs for individual investors.

Why Might You Want Software?

The development and expansion of high-speed Internet means that sophisticated tools can now be run from your Web browser. Over the years, Web-based portfolio trackers have become very popular, and there are now significantly more Web-based programs than portfolio tracking software programs. Web-based portfolio trackers offer real-time price updates (usually for a fee) and up-to-the-minute news articles on holdings in your portfolio. The best online portfolio managers can sync directly with your investment accounts, meaning you do not need to enter updates manually. However, while Web-based portfolio trackers are capable tools, software-based portfolio managers still represent a significant upgrade in a majority of areas of functionality.

This comparison is geared toward software-based portfolio management programs (we last compared online portfolio managers in the Fourth Quarter 2010 issue of Computerized Investing, available at www.comput

erizedinvesting.com). Software programs still offer the most powerful performance reporting, and they also offer a better ability to calculate gains and losses. The top software-based portfolio trackers are also able to handle more types of securities and transactions and will almost certainly offer a far greater variety of reports.

Features & Functionality

Most capable portfolio management programs offer similar features. But software is rarely free, so matching your personal needs is a more important issue when choosing software than it is when you are choosing between the free online portfolio trackers.

Our comparison grid on pages 24 and 25 details the features offered by our three top picks.

Costs and Time Commitments

Investing in portfolio management software will inevitably come with certain costs. In addition to monetary costs, you need to consider the time you will spend learning to use the program. What it takes to configure the program, how easy it is to use and how well it can handle your personal needs will eventually become larger factors than the monetary cost of the program.

In order to accurately gauge each programs (or websites) strengths and weaknesses, we make an effort to thoroughly use each service. Luckily, two of the three programs we review here offer fully functioning demos, allowing all potential users to try the software for themselves before purchasing (Quicken Premier 2011 does not offer a demo or trial version).

Securities/Assets Handled

The importance of a programs ability to handle a wealth of different securities cannot be overstated. When you are looking at a program, especially if you have a long investment horizon, consider not only whether it can handle the investments you currently own, but also whether it will be able to track investments that you may likely own in the future.

Programs that specialize in certain areas, such as options, are available, but for the purposes of this comparison our focus is on programs that support the securities that most individual investors own, including stocks, bonds, mutual funds, exchange-traded funds and real estate.

A programs ability to distinguish between asset types is particularly important, as it ensures that asset allocation and industry reports will be generated correctly.

Transactions Handled

The transactions supported by the program are closely related to the types of securities that the program handles. All of the programs discussed here handle standard transactions such as buying, selling and cash dividends. However, the ability to handle data points such as short sales and return of capital is important, and the programs vary in their functionality.

All of these programs allow you to specify security lot assignments for a transaction. This feature can be useful for tax liability issues and for tracking performance. A lot is the total number of units involved in a given trade. If you reinvest dividends from your mutual funds and stocks, you will find yourself tracking numerous lots over a long period of time. Any solid portfolio management package will automatically match buy and sell lots for different accounting strategies for the purpose of reducing tax exposure. The strategies include first in, first out (FIFO) ; average cost; and specific lot. Having a program that can handle all three is convenient.

Reports

Reports allow you to analyze your portfolio and investments. The three programs covered here vary in the type and flexibility of reporting they offer. When choosing a program, be sure to check whether the program generates not only the types of reports you want, but also other types of reports you may not currently use in your analysis. These extra reports might enhance your overall evaluation of your portfolio. While you want to be sure that a program provides enough flexibility and functionality to complete your analysis, again, you should consider possible future needs with regard to reporting capabilities.

The comparison grid lists the main report types offered by the top portfolio management programs. The current holdings report lays out the composition of your portfolio. At a minimum, programs will list the securities that are held, along with units, costs and current market value. Most software programs will also provide certain asset allocation and gain/loss data right on the main page. The holdings by lots report breaks down portfolio composition into finer increments, indicating each purchase at a specific date and price. This gives you a detailed history of your transactions and provides guidance for selling.

Tax schedules pertain to the Schedule B and Schedule D IRS forms. Designed for computing interest and dividends received from a portfolio, Schedule B reports allow you to estimate tax debt (or credit) before year-end statements arrive. Tax Schedule D reports compute long- and short-term capital gains and match assets that will yield capital gains with tax liabilities. Ideally, the program should also track foreign taxes withheld on your securities to help ensure that proper credit is accounted for when filling out your taxes. Tax reports are provided for a given tax year, so programs generally include a dialog to select the year to report upon. Tax reports can be tricky and, if your situation is complex, it may be prudent to consult with a tax professional. None of these programs specializes in tax reporting, so their capabilities may be limited depending on your investments and trading behavior.

The projected cash flow report serves as a forecast of the expected portfolio cash income from dividends, interest and bond maturities. This report is especially useful for investors who rely heavily on income-related investments, such as investors in retirement. Bond maturity schedules can assist investors in redeploying capital that is coming due.

Report customization can be content-related (for example, allowing you to choose the time period) or cosmetics-related (for example, allowing you to select column and row headings or even font size).

Portfolio alerts let you know when a security has crossed some predetermined price threshold. Such an alert may highlight a need for investigation that might otherwise go unnoticed.

Performance Reports

A basic part of the portfolio management process is to determine and analyze performance. The comparison grid summarizes each programs performance reporting capabilities. Performance reports are discussed more fully in the individual program summaries that follow.

A program should provide reports for securities, industries and asset classes; these reports should include performance and asset allocation analysis. Some programs allow for an examination among various asset classes, while others provide industry, section and individual security breakdowns. Reports covering single and multiple portfolios are important in order to fully address the diversified aspects of all your accounts.

All three programs discussed here also offer reports based on between-period returns, which allow you to monitor security performance during a known market environment. The programs store snapshots of your portfolios at various times and provide information on how portfolios perform during different market cycles.

Certain portfolio management programs offer the ability to calculate both a value-weighted (also referred to as a dollar-weighted) internal rate of return ( IRR) and a time-weighted rate of return. The IRR tends to be the best gauge because it represents the rate of return earned by your investments. It considers the time when inflows and outflows are made to the portfolio, the amounts of these flows, and the combined impact upon the overall rate of return. The time-weighted return is most often used to analyze the performance of investment decisions made by a money manager. A time-weighted calculation directly ignores the impact of any cash added to or removed from the portfolio. However, inflows and outflows should be considered by individual investors, not only because an individual does have control over them, but also because they are very common in retirement accounts and will have a large impact on the portfolios rate of return.

Tax-adjusted return reports generate pretax and aftertax returns, calculating the tax liabilities of your transactions and reporting the impact on the rate of return.