Retirement
Rebalancing Act
With market conditions and investor objectives constantly changing, portfolio rebalancing must be performed diligently to ensure an investment mix has not veered from its target weightings. And, as an effective method of countering emotional decisions, rebalancing also helps keep investors within their risk profile. It also has historically improved returns. These are some of the reasons that we make rebalancing a priority for our clients.
"Rebalancing is used to make the necessary adjustments that keep a portfolio in line with its original long-term goals and risk/return characteristics," says Tracy Chenier, vice-president of product development and management for Talvest in Montréal.
Rewards can be reaped-and reaped with less risk-because disciplined rebalancing aims to take advantage of the cyclical behaviour of capital markets while removing the temptation of market timing. And the results of the Disciplined rebalancing analysis research report, a study by San Francisco, Calif.-based Callan Associates Inc. in the year 2000, show the benefits of rebalancing. Using a conservative portfolio with a target asset mix of 35% U.S. large cap equity, 5% U.S. small cap equity, 20% non-U.S. equity and 40% U.S. fixed income, it was found that over a period of three decades (1970-1999), a disciplined rebalancing strategy outperformed a buy-and-hold strategy by 4 basis points per year (12.18% versus 12.14%). The study also found that rebalancing kept equity exposures closer to the target allocation than the buy-and-hold strategy.
The decision to rebalance can be made based on four methods: calendar-based, symmetric percentage ranges, asymmetric percentage ranges and lifestyle events. According to Maxime-Jean Gérin, first vice-president of global asset allocation and currency management at TAL Global Asset Management in Montréal, the most prudent time to rebalance is when the drift from the target weightings has become sizeable enough to impact an investor's portfolio. "For institutional portfolios, this will be a 1% drift, but for an individual client portfolio, because of potential tax implications, 5% would probably be more appropriate, but it depends on the client," says Gérin.
However, if an investor becomes too active with a rebalancing strategy, it can quickly become complicated and time consuming. Which is probably why offerings such as Talvest's Synchrony portfolios from Maritime Life (which consist of 7 to 12 funds each and are rebalanced within a tight threshold range with a tilt towards the most attractive asset class) or a Global Multi Management Fund, a fund comprised of four underlying funds, are popular with investors. "The reason we tend to see more people buying into these products is because rebalancing a portfolio takes time," says Chenier. "But when you have a product structure that has all of that already wrapped up in it, it's simplicity for clients."
Rebalancing is also a critical component of long-term asset allocation, the process of spreading savings over various classes of investments to minimize risk. Due to the extreme difficulty of predicting markets, the selection of asset classes is often more important to an investor's total return than the specific securities themselves. Disciplined rebalancing therefore helps ensure that a portfolio remains true to its long-term plan.