We believe a disciplined rebalancing strategy at Valedictory Investment Management, LLC (VIM) is a value-added strategy. In our experience, most investment advisors rebalance using a fixed percentage interval (i.e. rebalance to policy when equities deviates more than 10% from its initial allocation). Several academic studies advocate utilizing a fixed-time interval (i.e. rebalance annually). While these strategies may prove to be the most convenient for the individual investor and for the advisor to implement, we view fixed-percentage and fixed-time interval strategies to be somewhat too arbitrary.
At Valedictory, we believe in achieving a premium from rebalancing– a value-based strategy. we rebalance whenever an asset class deviates a percentage of its allocation (note: not a fixed percent number) from its policy allocation, capturing short-term momentum while avoiding medium-term regression in time-varying asset class leadership. The result is selling high (recent top-performing asset class funds) and buying low (recent lagging asset class funds). This strategy should produce a source of excess returns over a struct buy-and-hold strategy over the long-term.
Our intent is to make portfolio changes seldomly. If we did our research work correctly upfront, there shouldn’t be much trading required. We expect to rebalance infrequently and primarily using cash flows.
Throughout the year, we will review our holdings to see if there have been any fundamental changes to the funds or companies that may require some portfolio tweaking. These will almost certainly be to the changes in our underlying holdings’ “6P’s” (fund selection) or “5C’s” (monitoring) that we’ve outlined. Annually, typically towards the end of the year, we will review the portfolio for any tax loss/ gain harvesting or seasonal trading opportunities (e.g. recent underperformers or closed-end fund sales). On an ongoing basis, we review if major moves in asset classes or our holdings have resulted in large relative mis-weightings against our intended asset allocation. We look for a +/- 20% relative mis-weight to trigger a rebalancing trade. We also ongoingly review academic literature and practitioner research on new insights on asset allocation and portfolio construction. Periodically, we will make minor modifications to our policy or investment process if we believe the new methods found are compelling and sensible. Every few years, there may be a major (read: two standard deviation type) market dislocation in one of the asset classes, which may temporarily open up promising investment opportunities. We will seek to quickly assess and potentially invest in these situations. Finally, we may make some portfolio tweaks due to major changes in the investment environment stemming from global macroeconomic news or geopolitical developments. Our review schedule can be summarized as follows:
- Semi-annually: an underlying change to the investment thesis of our holdings
- Annually: consider any tax or seasonal trading opportunities
- Occasionally: rebalance to close large relative mis-weightings
- Rare: new compelling research leading to an update of our asset allocation or investment process
- Rarer: large market dislocation that reveals temporary value opportunities
- Rarer: significant shifts in the global investment landscape prompting a trade