18 Investments 9 Portfolio Rebalancing and Reporting4279

8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279

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Personal Finance:

Another Perspective

Investments 9:Portfolio Rebalancing and

Reporting


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Objectives

A. Understand portfolio rebalancing

. Understand the importance of portfolio

management and performance eval!ation

". Understand ris#$adj!sted performance

meas!res

%. Understand ho& to perform attrib!tion

anal'sis


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(

Investment Plan Assignments

Investments 9: Portfolio Rebalancing and Reporting

). %etermine the t'pe of rebalancing 'o! &ill li#el' !se and

ho& often 'o! &ill rebalance* and incl!de it in 'o!r

investment plan !nder section I+..2 of 'o!r Investment

Plan.2. ,hin# thro!gh the ne& mone'-donations addend!m* and ho&

'o! &ill !tilie it to minimie ta/es and transactions costs in

rebalancing

(. %etermine ho& often 'o! &ill monitor and report on 'o!r

portfolio* and incl!de it in I+.A.).0. %etermine ho& 'o! &ill comm!nicate portfolio res!lts and

incl!de it in section I+.".


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A. Understand Portfolio Rebalancing

4hat is portfolio rebalancing5

6 ,he process of bringing portfolios bac# into given

target asset allocation ratios

4hat ca!ses the need to rebalance56 "hanges occ!r d!e to:

6 "hanges in asset class performance

6 "hanges in investor objectives or ris#

6 Introd!ction of ne& capital

6 Introd!ction of ne& asset classes


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7

Portfolio Rebalancing8contin!ed

4h' is this rebalancing so critical5

6 ,here are competing principles:

6 inimie transactions costs and ta/es

6 inimie trac#ing error at 'o!r ris# tolerance level

4hat is trac#ing error5

6 It is the ret!rn that is lost from 'o!r portfolio being

different from 'o!r target &eight

4hat are the different &a's of rebalancing5

6 Periodic$based 8or calendar$based

6 Percent$range$based 8or volatilit'$based


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Periodic$based rebalancing

6


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Percent$range$based rebalancing

6 Rebalance the portfolio ever' time act!al holdings are>-$3? 8or >-$)1? from target ratios. Rebalance&henever 'o! are o!tside this range

6 Advantages

6 @as' to implement

6 4ider ranges &ill red!ce transactions costs 8at thee/pense of higher trac#ing error

6 Asset performance &ill trigger rebalancing

6 %isadvantages

6


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6 B%C 8Be& one' - %onations Addend!m

6


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B% Addend!m 8contin!ed

6 Rebalance !sing appreciated assets for 'o!r

charitable contrib!tions 8see earning ,ool =

6 Use the mone' 'o! &o!ld have spent forcontrib!tions to p!rchase !nder&eight assets

6 ,his &a' 'o! eliminate 'o!r capital

gains ta/es for the contrib!ted assets*

and 'o! get the f!ll benefit of theded!ction for 'o!r ta/es* i.e.* 'o! sell

&itho!t ta/ conseD!ences

)1


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4hich are the best methods5

6 Eenerall'* for most investors &ith fe&er investable

assets* the easiest is li#el' to be most !seable

6Eenerall'* a combination of periodic$based orpercent$range$based rebalancing is most !sef!l &ith

the B% addend!m

6 Revie& the portfolio ann!all'* b!t onl'

rebalance &hen 'o! are >-$ 3? to >-$)1? 8or

some range be'ond 'o!r targets. ,henrebalance bac# to 'o!r targets

6 Remember* the goal is to minimie

transactions costs* ta/es* and trac#ing error

costs


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!estions

6 An' D!estions on portfolio rebalancing5


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. Understand the Importance of

Portfolio anagement and @val!ation

4hat is portfolio management5

6 ,he development* constr!ction* and management of

a portfolio of financial assets to attain an investorGs

specific goals4hat is performance eval!ation5

6 ,he process of eval!ating a portfolioGs performance

&ith the goal of !nderstanding the #e' so!rces of

ret!rn4h' are these t&o topics so important5

6 oth are complicated s!bjects and both are critical

to investing


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Portfolio anagement

and @val!ation8contin!ed

4hat is activeC portfolio management5

6 ,he process of !sing p!blicl' available data to

activel' manage a portfolio in an effort to:

6 eat the benchmar# after all transactions costs*ta/es* management* and other fees

6 Ho&ever* 'o! m!st do this consistentl'

'ear$after$'ear* and not j!st from l!c#

6 4h' is activeC management s!ch a hot topic56 anagement fees for m!t!al f!nds &hich can

consistentl' o!tperform their benchmar#s are 3$23

times higher than those on passive management 8)9

basis points vers!s 231 basis points


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)3

Portfolio anagement


4hat is passiveC portfolio management56 ,he process of b!'ing a diversified portfolio &hich

represents a broad mar#et inde/ 8or benchmar#&itho!t an' attempt to o!tperform the mar#et or

pic# stoc#s

4h' is passiveC management s!ch a hottopic56 ost active managers fail to o!tperform their

benchmar#s* especiall' after costs and ta/es6 Investors have realied that if 'o! canGt beat

them* join them* so the' b!' lo&$cost passivef!nds &hich meet their benchmar#s consistentl'

and minimie ta/es


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Portfolio anagement


4hat factors lead to above$benchmar# or

e/cess ret!rns5

6 ).

6 6 Pic#ing sectors* ind!stries* or companies &ithina specified benchmar# &hich* as a &hole*

o!tperform the ret!rn on the specified

benchmar#


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Portfolio anagement


4hat is s!perior asset allocation5

6 ,he process &here the investor gains a higher

ret!rn than the benchmar# from adj!sting the

investment portfolio for movements in the mar#et6 ,he investor shifts among stoc#s* bonds and

other asset classes based on their e/pectations

for ret!rns from each of the asset classes

4hat are the res!lts56 %one &ell* s!perior asset allocation 'ields higher

ret!rns &ith lo&er ris#.

6 %one poorl'* it 'ields lo&er ret!rns* higher

transactions costs* and higher ta/es


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Portfolio anagement


4hat is s!perior stoc# selection5

6 ,he process &here the investor b!ilds an

investment portfolio &hich earns ret!rns in e/cess

of the benchmar# thro!gh b!'ing or selling!nderval!ed stoc#s* sectors or ind!stries

6 ,he investor shifts among the vario!s sec!rities

of the inde/ in an attempt to b!' the sec!rities

&ith the highest gro&th potential

4hat are the res!lts5

6 %one &ell* s!perior selection 'ields higher ret!rns

&ith lo&er ris#.

6 %one poorl'* it 'ields lo&er ret!rns* hightransactions costs* and high ta/es


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Portfolio anagement


4hat is portfolio eval!ation5

6 ,he process of monitoring financial asset

performance* comparing asset performance to the

relevant benchmar#s* and determining ho& &ell thef!nd is meeting its objectives.

6 If the assets are !nderperforming benchmar#s*

the investor ma' sell !nderperforming assets and

p!rchase other assets &hich &o!ld more closel'

align asset performance &ith benchmar#s


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Portfolio anagement


4h' monitor performance5

6 Unless 'o! monitor performance* 'o! &ill not

#no& ho& 'o! are doing in &or#ing to&ard

accomplishing 'o!r objectives6 o! need to #no& ho& ever' asset 'o! o&n is

performing* and performing vers!s its benchmar#*

so 'o! can determine ho& &ell 'o! are moving

to&ard 'o!r goals


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Portfolio anagement


Ho& do 'o! eval!ate performance5

6 "alc!late:

6 ). ,he period ret!rn on each o&ned asset

6 2. ,he period inde/ ret!rn for each benchmar#6 (. ,he difference bet&een the asset ret!rn and

benchmar# ret!rn

6 0. ,he &eight of each asset or portfolio in the overall

portfolio

6 3. ,he overall portfolio ret!rn

6 4ith this information* 'o! can #no& ho& each of 'o!r

f!nds or assets is performing vers!s its benchmar#* and

ho& &ell the portfolio is moving to&ard its objectives


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Portfolio anagement


4hat is portfolio reporting5

6 ,he process of revie&ing portfolio performance

&ith the necessar' participants* i.e. 'o!r spo!se

6 If 'o! are managing 'o!r portfolio* 'o! sho!ldreport performance to 'o!r spo!se at least

monthl' or D!arterl'

6 If others are helping 'o! manage 'o!r portfolio*

the' sho!ld report performance to 'o! and 'o!rspo!se at least D!arterl' as &ell.

6 e caref!l not to do too m!ch b!'ing and selling* as

these inc!r transactions costs and ta/es


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!estions

An' D!estions on the importance of portfolio

management and eval!ation5


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". "alc!late Ris#$adj!sted Performance

Ho& do 'o! determine &hether a portfolio manager is

generating e/cess ret!rns 8i.e.* ret!rns above the

managerGs benchmar#5

6 Is it onl' ret!rns5


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Ris# Adj!sted Performance:


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,re'nor

,re'nor eas!re

6 ,his is similar to


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Kensen

KensenGs eas!re

6 ,his is the ratio of 'o!r portfolio ret!rn less "AP

determined portfolio ret!rn

6 apM rp$ rf > Np8rmL rf apM Alpha for the portfolio

rpM Average ret!rn on the portfolio

NpM 4eighted average eta

rfM Average ris# free rate

rmM Average ret!rn on mar#et inde/ port.

6 It is portfolio performance less e/pected portfolio

performance from "AP


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4hich meas!re is most appropriate5 Are there some

general g!idelines5

6 Eenerall'* if the portfolio represents the entire

investment for an individ!al* the


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Are their limitations of ris# adj!stment

meas!res5

6 es* ver' m!ch so. ,he ass!mptions !nderl'ing

meas!res limit their !sef!lness6 Qno& the #e' ass!mptions and be caref!l

6 4hen the portfolio is being activel' managed* basic

stabilit' reD!irements are not met

6 e caref!l &hen portfolios are activel' managed6 Practitioners often !se benchmar# portfolio

comparisons and comparisons to other managers to

meas!re performance

6 ,his is largel' beca!se the' are easier

Ris# Adj!sted Performance8contin!ed


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Ris# Adj!sted Performance8contin!ed

4hat abo!t st'le anal'sis5

6 Another &a' of obtaining abnormal ret!rns is

chasing st'le

6 Ero&th vers!s val!eJ&hatGs hot56 o! can decompose ret!rns b' attrib!ting allocation

to st'le

6


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!estions

6 An' D!estions on ris#$adj!sted performance

meas!res5


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%. Understand Ho& to Perform

Portfolio Attrib!tion 8this is optional

4hat is portfolio attrib!tion5

6 ,he process of separating o!t portfolio ret!rns into

their related components* generall' attrib!table to

asset allocation and sec!rities selection

4hat is the importance of these components5

6 ,hese components are related to elements of

portfolio performance* to see &hat 'o! do &ell

4hat are e/amples of some of thesecomponents5

6 road asset allocation


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Portfolio Attrib!tion8contin!ed

Ho& do 'o! determine portfolio attrib!tion5

6 ).


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6 0. "ompare 'o!r portfolio ret!rns in each asset

class to the benchmar# ret!rns of each inde/

6 Use ,eaching ,ool );: Portfolio Attrib!tion


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4h' is it important to attrib!te performance to

the portfolioGs components5

6 It can e/plain the difference in ret!rn based on

component &eights or selection

6 It can s!mmarie the performance differences into

appropriate categories

6 It can help 'o! #no& ho& 'o! are doing

4hat happens if 'o! donGt perform portfolioattrib!tion5

6 o! &ill not #no& &h' 'o! are performing as 'o! are

6 o! &ill not #no& ho& to improve



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4hat do 'o! do if 'o!r activel' managed

f!nds contin!e to !nderperform5

6 4atch them caref!ll'. Underperformance for a

month or D!arter is !nderstandable* b!t over )2$(7months it sho!ld be positive

6 If not* find another f!nd or inde/ the asset class

performance

Ho& long does it ta#e to determine &hether anactive manager is good or not5

6 Eenerall'* )2$(7 months


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!estions

An' D!estions on portfolio attrib!tion5


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Revie& of Objectives

A. %o 'o! !nderstand the different t'pes and

!ses of inde/es5

. %o 'o! !nderstand the Importance of

Portfolio anagement and Performance@val!ation5

". %o 'o! !nderstand portfolio rebalancing5

%. %o 'o! !nderstand ris#$adj!stedperformance meas!res5

@. %o 'o! !nderstand ho& to perform

attrib!tion anal'sis5


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(9

"ase

class &eights are different from their targets d!e to the

o!t$performance of the eD!it' part of their portfolios.

Asset "lass Act!al 4eight ,arget 4eight %ifference

@D!it' ;1? 71? )1?

onds 21? (1? $)1?

"ash )1? )1? 1?

Application: 4hen sho!ld the' rebalance their portfolio andho& sho!ld the do it5


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01

"ase


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"ase


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02

"ase


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0(

"ase


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"ase


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"ase

Ret!rn 4eight 4eight Ret!rn

@D!it' 2.1? ;1? 71? 2.3?

onds ).1? 21? (1? ).2?"ash 1.3? )1? )1? 1.3?

"alc!lations and Application:4hat &as their over or !nderperformance5 4hat &as theircontrib!tion to sec!rit' selection and to asset allocation5 Ho&

did the' do for the D!arter5


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07

"ase


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"ase


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"ase


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"ase

performed the benchmar# b' .27? or 27 basis points

8).73?$).9)?. ,his !nderperformance &as a

combination of a $.(9? contrib!tion to sec!rit' selectionand a .)(? contrib!tion from asset allocation. 4hile

the' did &ell over&eighting 8vers!s their asset allocation

targets the asset classes that performed &ell* the' didnGt

do as &ell pic#ing the assets in those asset classes.6 If this performance contin!ed for 20$(7 months* the'

sho!ld consider inde/ing the stoc# selection decision*

i.e. b!' inde/ f!nds* and #eep doing &hat the' are doing

&ith the asset class decision.

Documents

18 Investments 9 Portfolio Rebalancing and Reporting4279