Rebalancing Your Portfolio
Given the volatility of 2020, and the expected volatility in the current year, clients were curious as to how other institutions were handling their rebalancing decisions. FEG issued a flash poll in late December to address several questions of interest to our clients around the subject of rebalancing including an organization’s approach to rebalancing, the rebalancing decision-makers, and how rebalancing was handled in response to the March 2020 market sell-off. With the results, we hope organizations can re-examine their institutions' overall decision-making process and determine if the right governance and investment policy is in place to address the next crisis.
TYPICAL APPROACH TO REBALANCING
A large majority of respondents indicated they employ a market value-based approach to rebalancing (64%). This was followed by 21% of respondents who indicated they rebalance in response to meaningful shifts in cashflow.
Investment committees (40%) were found to be the most prevalent responsible party for making rebalancing decisions, followed closely by investment staff (33%).
CORONAVIRUS & MARKET CORRECTION IMPACT
Approximately 49% of respondents rebalanced in response to the March 2020 market correction. Of those respondents that rebalanced, over 80% rebalanced to targets, either immediately or through dollar-cost averaging.
In theory, rebalancing portfolios is straightforward—sell high and buy low based on the institution’s investment policy. However, in times of severe market stress, emotions battle with logic and decisions become complicated. To counter emotional decision-making, FEG believes in setting quantitative parameters around asset class—and potentially positional—drift. For example, if an organization sets an asset class drift parameter of +/- 3% from strategic asset allocation targets, in the absence of sound, logical reasoning to forego rebalancing, a rebalancing exercise should automatically trigger upon an asset class violating the stated guidelines.
ABOUT THE SURVEY
FEG flash poll collected data from institutional investors in a wide variety of segments to provide insight on current topics. The poll looked at questions related to rebalancing following the March 2020 market lows. FEG received responses from 62 participants, the majority of which came from higher education organizations. More than 30% of respondents indicated that they manage over $1 billion in assets and more than 66% indicated that they use a consulting service model. FEG would like to thank all survey participants for their contributions.
This report was prepared by Fund Evaluation Group, LLC (FEG), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directed to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202 Attention: Compliance Department.
Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities.
This report is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.
Published February 2021.