Investors should stick with rebalancing but also rethink their strategic asset allocation amidst the current market turmoil, according to asset managers and consultants.
According to Aon, investors should follow a “disciplined, policy-oriented rebalancing strategy”.
It said a test it carried out of two 60/40 equity/fixed income portfolios over multiple historical bear markets lasting more than one year showed that a portfolio rebalancing on a monthly basis outperformed a “drifting” portfolio.
The consultancy acknowledged that market volatility may make it difficult to rebalance to the desired strategic allocations, and said that a phasing-in approach may therefore be appropriate and that “modest tilts toward more attractive markets” within the bands of the investment policy could add value.
The consultancy is recommending investors explore the use of opportunity allocations and medium-term views to guide rebalancing.
“There is much that can distract investors in stressed markets, not least the behavioural financing of the crowd,” said Daniel Peters, partner at Aon.
”When the momentum of the stock market appears to be one way – down – it’s hard for anyone to step back and assess what really is the best course of action – or inaction – for their scheme.
“Our analysis of historical experience leads us to advocate an approach of disciplined rebalancing, enabling investors to stay focused on a long-term investment policy. Timing markets is never straightforward and can be costly – nevertheless we firmly believe that disciplined rebalancing adds value.”
Pension funds responding to an IPE survey last month indicated different approaches to rebalancing, with some for example temporarily suspending rebalancing and others pursuing “a slow rebalancing”.
Rebalancing in stages
According to the global investment committee of Nuveen, the investment manager of US pension fund TIAA, investors should continue or start to rebalance portfolios, provided they have the near-term liquidity they need to meet spending and liability needs.
Rebalancing in stages rather than all at once, as some investors were doing, made sense, it said in written commentary.
Both changes in valuations between asset classes as well as between relative risk expectations needed to be considered when rebalancing portfolios, it recommended.
In addition, asset owners invested in long-term illiquid investments should consider using public market proxies as a guide to current values given that long-term illiquid assets are priced with a lag.
BlackRock, meanwhile, has said that investors should not lose sight of strategic asset allocation (SAA). It said it observed that “although there has been significant money in motion over the last few weeks, most moves have been tactical adjustments”.
Jean Boivin, head of BlackRock Investment Institute, said: “The time to re-think strategic asset allocation is now. We hear from clients and our own multi-asset investors that there is a need to re-think the role of portfolio diversifiers, of fixed income, and of environmental, social and governance (ESG) strategies in a world that looks very different from a month ago.”
The asset manager said it views portfolio rebalancing as an opportunity “to substitute some traditional assets with sustainable ones”.
Ursula Marchioni, head of BlackRock portfolio analysis solutions, said: “We are about to see a significant step change in sustainable investing in Europe, fuelled by the market-driven review of strategic asset allocation, coupled with greater availability of ESG data and technology.
“As investors materially shift their allocations, they will have the opportunity to transform their whole portfolio, beyond the current tactical adoption of products at the fringes.”