Allocators Rebalance Too Often, JPM Says

Instead of rebalancing quarterly or monthly, do it annually, and more strategically, the firm advises.



Rebalancing needs to get rebalanced itself. So says a recent commentary from JPMorgan Asset Management. Trouble is, asset allocators rejigger their portfolios too often, according to JPM’s head of institutional strategy, Jared Gross.

Monthly or quarterly rebalancing is doing nothing to improve performance, he said. What’s better, he explained, is to replace 10% or more of a portfolio every year, using flexible strategic assessments.

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An annual reallocation fares better through time, compared with monthly or quarterly re-dos, JPM data indicate, using a 60/40 stock-bond breakdown. “Raising the bar for rebalancing – even in volatile markets – may raise returns over the long run,” Gross contended.

He went on to state the ideal: “Well-diversified private strategies reallocate capital internally across assets, sectors, and geographies to take advantage of market swings to improve long-term performance.”

The shorter-term reallocations fall short, he said, because “they are hard to reconcile with the longer-term trends of financial markets.”

Reason:Frequent sharp reversals over short time horizons are not the norm, yet mechanical rebalancing strategies are constructed around capturing just such movements.” The average bear market has lasted 22 months, while the average bull market has lasted 56 months, he noted. 

The best rebalancing opportunity is when two asset classes move at the same time in opposite directions, he said. Sometimes stocks will move one way, but bonds won’t make much of a move. Rather than shuttle between the two, some investors maintain a large reserve of cash to buy in one direction or the other.

The problem with that, Gross wrote, is that “the return drag that it would create over longer horizons would likely outweigh the benefits.”

Using alternative assets in rebalancing is often not a good idea, as they are best kept aside for liquidity needs and for long-term appreciation, he said. “It makes little sense to withdraw capital from private strategies that are built around carefully constructed portfolios of illiquid assets that accumulate value over long time horizons,” Gross declared. “Selling these strategies in reaction to volatility in public markets short-circuits this process.”

More thought is required in rebalancing than many investors employ, he indicated. Wrote Gross, “Mechanical rebalancing is no substitute for a thoughtful process that incorporates the latest macroeconomic and market data alongside a rigorous asset allocation model.” 

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Public Funds Are Among Strongest Backers of ESG Resolutions

State and local pension funds favor environmental, social and governance shareholder resolutions at higher rates than do general shareholders, Morningstar research shows.  



Public pension funds strongly support environmental, social and governance shareholder resolutions, Morningstar data show.  

According to a Morningstar research report released this month, public pension funds’ average rate of support for ESG resolutions was 90% in 2021, compared with 85% of ESG-focused funds and 63% of general shareholders.

“Basically, public pension funds’ voting behavior looks very similar to mutual funds and [exchange-traded funds] that focus on ESG issues,” says Janet Yang Rohr, director for multi-asset and alternatives research, North America at Morningstar. “[Public pension funds] actually vote more strongly with ESG issues compared with ESG-focused funds, where the reason for being is to support ESG items.”

ESG shareholder resolutions reached a record high of 273 in 2022, from 171 in 2021, the research shows. Morningstar’s report says that, on average, ESG resolutions earned 34% of public pensions’ support in 2021, an increase from 27% in 2019. In 2021, 36 ESG resolutions passed with majority support, an increase from 20 in 2020. And in 2022, ESG resolutions reached 30% support, with 40 resolutions passed, the report says.

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“Proxy-voting results can directly affect company behavior and economic results, so there’s good reason to know how public funds use their market power to influence these outcomes,” the report states.

A Morningstar research report published in July also found that ESG considerations are integral to defined benefit plans. The firm’s Voice of the Asset Owner Survey found that institutional asset owners at pension funds currently view sustainable investing as a fundamental element of investing, not as an esoteric approach that could damage potential returns.  

Morningstar’s new research comes at a politically tempestuous time for ESG investing, which has lately come under attack in several states led by Republican governors, including Florida and Texas. In early August, a group of 19 attorneys general co-wrote a letter to BlackRock CEO Larry Fink, criticizing the asset manager for using state pension fund assets in ESG investments that they claimed “force the phase-out of fossil fuels, increase energy prices, drive inflation and weaken the national security of the United States.” And, on August 23, the trustees of Florida’s State Board of Administration voted to ban ESG considerations from the asset allocator’s investment decisions.

“Given that there’s a lot of political chatter around ESG investing, we also wanted to look at the results along party lines,” Yang Rohr says. “We took the pension funds that we looked at … and matched them up to the state where they belong and looked at their Partisan Lean Scores from the online publication FiveThirtyEight, and basically assigned them into three buckets.”

Among states with a Democratic lean, average support in 2021 for ESG resolutions was 98%, compared with 85% for split states without a partisan lean and 80% in states that lean Republican, the research found.   
Yang Rohr explains that “the support for ESG resolutions goes down in a stair step: state pensions in Democratic states have very strong support, but maybe the more surprising thing is even Republican states have relatively high support.”

She adds, “[Republican support] falls only a little bit below ESG-focused funds, but it’s considerably ahead of general shareholders.”

The Morningstar research notes that because reporting from many public pensions can considerably lag proxy voting season—between April and June of each year, when U.S. public companies hold their annual shareholder meetings—the findings in the paper were focused on the 2021 proxy vote outcomes.

“No matter the political lean of their state, public pensions across the country have plenty of room to improve when it comes to providing more transparency on how they voted and describing the rationales for their votes,” the report says.

The Morningstar findings are based on a data sample of state and local defined benefit pension funds that represent the assets of 14 million workers and retired plan participants with a total of $3.4 trillion in assets. Researchers used lists of the largest public plans and culled the data to identify the top 30 from the U.S. Census Bureau’s annual survey of U.S. pension funds, Yang Rohr says.

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