To Rebalance, or Not to Rebalance? | Chief Investment Officer

(January 25, 2013) — Investors have been warned that paying attention to their asset allocation and general market conditions is as important as maintaining a perfect portfolio split when considering rebalancing activity.

Research from market monitor Factset found there was more to deciding on whether to rebalance a portfolio than merely looking at the the cost in relation to the benefit on the return profile of a portfolio and the frequency with which it was carried out.

Drew J. Cronin, vice president of portfolio analytics at FactSet, said that generally a portfolio will have higher returns without rebalancing during a trending upmarket. This is due to an expanding weighting to an outperforming asset class gathering more good returns.

The reverse is true when markets are oscillating as rebalancing portfolios allows larger allocations to assets that have fallen lower and are more likely to perform, Cronin said.

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However, this concept only functions in practice if an investor is certain on where markets are heading – and this is almost never the case, Cronin said.

“Because we don’t know the future with certainty, a big piece of any asset allocation strategy is hedging against that uncertainty,” Cronin said. “If a portfolio’s long-term strategy calls for a particular asset allocation split, then we should focus less on trying to time the market and more on the observable trends that may justify more frequent rebalancing.”

Cronin mapped out how changes in volatility and the correlation within a portfolio’s assets would affect returns and said that these two factors were essential to consider before starting a rebalancing regime.

“Recent market conditions are unlike any other period in recent history, with high volatility, extremely low correlations, and high domestic equity returns,” Cronin concluded. “The benefit of frequent rebalancing should be weighed against the cost (turnover and trading costs) to determine your own optimal rebalance policy and ensure that you’re prepared for future uncertainty in the market.”

To read the full research note, click here.

(January 25, 2013) — Assets held in exchange-traded products (ETP) reached a record $2 trillion this month, as product ranges have grown to entice investors, BlackRock has reported.

The ETP market had record inflows last year, the giant asset manager’s research team said today, attracting $262.7 billion in new money. Assets at the end of the year had grown by 27%.

Good growth continued through the start of the New Year and on January 18 the ETP market was valued at $2 trillion, BlackRock said. This was double the $1 trillion figure it reached in 2009, some 19 years after the first product was launched.

Dodd Kittsley, global head of ETP research for BlackRock, said: “The dynamics of the ETP market are changing and developing. As ETPs become better known and understood in different regions and amongst different types of investors, uptake is fast increasing. Added to this, ETP providers are expanding and deepening their coverage of different assets classes and regions, allowing investors to put ETPs to use in new ways and employ them to access areas where they couldn’t before, such as emerging market debt.”

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Fixed income ETPs and emerging market equity ETPs saw record inflows last year, notching up $70 billion and $54.6 billion respectively.

Following the quasi-collapse of the banking system in 2008, many investors rushed towards passively invested funds, such as ETPs, in an attempt to avoid paying actively managed fund fees for relatively poor performance.

There was an explosion of new products and providers, alongside long-established asset managers launching ETP units.

A good indicator of the potential growth of the market came when BlackRock acquired competitor Barclays Global Investors, which owned the large ETP provider iShares, in December 2009.

“ETPs were once thought of as primarily equity-based funds for institutional investors, and today’s milestone proves this is certainly no longer the case,” said Kittsley.