Portfolio rebalancing is a crucial but perhaps underappreciated aspect of multi-asset portfolio management, whose importance was highlighted by the extreme market volatility of recent quarters. The rebalance policy supports larger risk and return objectives captured in a portfolio’s strategic and tactical asset allocation targets, which incorporate an asset manager’s alpha strategy. However, rebalancing involves tension between transaction costs and tracking error, or how closely the portfolio adheres to its targeted allocation. These costs rise exponentially in times of market stress. As a result, a robust rebalance policy must account for market regime. In most environments, where transaction costs are low and markets are highly liquid, narrow rebalance bands strike a good balance between cost and risk control. But when volatility spikes, costs rise and liquidity evaporates, wider bands become preferable. Ultimately, we believe that rebalance guidelines are preferable to hard and fast rules, and that active managers and traders can add significant value precisely when volatility spikes.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
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