18 investments 9 portfolio rebalancing and reporting4279
TRANSCRIPT
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
1/49
1
Personal Finance:
Another Perspective
Investments 9:Portfolio Rebalancing and
Reporting
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
2/49
2
Objectives
A. Understand portfolio rebalancing
. Understand the importance of portfolio
management and performance eval!ation
". Understand ris#$adj!sted performance
meas!res
%. Understand ho& to perform attrib!tion
anal'sis
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
3/49
(
Investment Plan Assignments
Investments 9: Portfolio Rebalancing and Reporting
). %etermine the t'pe of rebalancing 'o! &ill li#el' !se and
ho& often 'o! &ill rebalance* and incl!de it in 'o!r
investment plan !nder section I+..2 of 'o!r Investment
Plan.2. ,hin# thro!gh the ne& mone'-donations addend!m* and ho&
'o! &ill !tilie it to minimie ta/es and transactions costs in
rebalancing
(. %etermine ho& often 'o! &ill monitor and report on 'o!r
portfolio* and incl!de it in I+.A.).0. %etermine ho& 'o! &ill comm!nicate portfolio res!lts and
incl!de it in section I+.".
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
4/49
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
5/49
3
A. Understand Portfolio Rebalancing
4hat is portfolio rebalancing5
6 ,he process of bringing portfolios bac# into given
target asset allocation ratios
4hat ca!ses the need to rebalance56 "hanges occ!r d!e to:
6 "hanges in asset class performance
6 "hanges in investor objectives or ris#
6 Introd!ction of ne& capital
6 Introd!ction of ne& asset classes
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
6/49
7
Portfolio Rebalancing8contin!ed
4h' is this rebalancing so critical5
6 ,here are competing principles:
6 inimie transactions costs and ta/es
6 inimie trac#ing error at 'o!r ris# tolerance level
4hat is trac#ing error5
6 It is the ret!rn that is lost from 'o!r portfolio being
different from 'o!r target &eight
4hat are the different &a's of rebalancing5
6 Periodic$based 8or calendar$based
6 Percent$range$based 8or volatilit'$based
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
7/49
;
Portfolio Rebalancing8contin!ed
Periodic$based rebalancing
6
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
8/49
=
Portfolio Rebalancing8contin!ed
Percent$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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
9/49
9
Portfolio Rebalancing8contin!ed
6 B%C 8Be& one' - %onations Addend!m
6
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
10/49
Portfolio Rebalancing8contin!ed
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
11/49
))
Portfolio Rebalancing8contin!ed
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 >-$)1? 8or
some range be'ond 'o!r targets. ,henrebalance bac# to 'o!r targets
6 Remember* the goal is to minimie
transactions costs* ta/es* and trac#ing error
costs
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
12/49
)2
!estions
6 An' D!estions on portfolio rebalancing5
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
13/49
)(
. Understand the Importance of
Portfolio anagement and @val!ation
4hat is portfolio management5
6 ,he development* constr!ction* and management of
a portfolio of financial assets to attain an investorGs
specific goals4hat is performance eval!ation5
6 ,he process of eval!ating a portfolioGs performance
&ith the goal of !nderstanding the #e' so!rces of
ret!rn4h' are these t&o topics so important5
6 oth are complicated s!bjects and both are critical
to investing
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
14/49
)0
Portfolio anagement
and @val!ation8contin!ed
4hat is activeC portfolio management5
6 ,he process of !sing p!blicl' available data to
activel' manage a portfolio in an effort to:
6 eat the benchmar# after all transactions costs*ta/es* management* and other fees
6 Ho&ever* 'o! m!st do this consistentl'
'ear$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$23
times higher than those on passive management 8)9
basis points vers!s 231 basis points
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
15/49
)3
Portfolio anagement
and @val!ation8contin!ed
4hat is passiveC portfolio management56 ,he process of b!'ing a diversified portfolio &hich
represents a broad mar#et inde/ 8or benchmar#&itho!t an' attempt to o!tperform the mar#et or
pic# stoc#s
4h' is passiveC management s!ch a hottopic56 ost active managers fail to o!tperform their
benchmar#s* especiall' after costs and ta/es6 Investors have realied that if 'o! canGt beat
them* join them* so the' b!' lo&$cost passivef!nds &hich meet their benchmar#s consistentl'
and minimie ta/es
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
16/49
)7
Portfolio anagement
and @val!ation8contin!ed
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#
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
17/49
);
Portfolio anagement
and @val!ation8contin!ed
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
18/49
)=
Portfolio anagement
and @val!ation8contin!ed
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
19/49
)9
Portfolio anagement
and @val!ation8contin!ed
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
20/49
21
Portfolio anagement
and @val!ation8contin!ed
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
21/49
2)
Portfolio anagement
and @val!ation8contin!ed
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
22/49
22
Portfolio anagement
and @val!ation8contin!ed
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
23/49
2(
!estions
An' D!estions on the importance of portfolio
management and eval!ation5
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
24/49
20
". "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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
25/49
23
Ris# Adj!sted Performance:
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
26/49
27
Ris# Adj!sted Performance:
,re'nor
,re'nor eas!re
6 ,his is similar to
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
27/49
2;
Ris# Adj!sted Performance:
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
28/49
2=
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
29/49
29
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
30/49
(1
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
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
31/49
()
!estions
6 An' D!estions on ris#$adj!sted performance
meas!res5
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
32/49
(2
%. Understand Ho& to Perform
Portfolio Attrib!tion 8this is optional
4hat is portfolio attrib!tion5
6 ,he process of separating o!t portfolio ret!rns into
their related components* generall' attrib!table to
asset allocation and sec!rities selection
4hat is the importance of these components5
6 ,hese components are related to elements of
portfolio performance* to see &hat 'o! do &ell
4hat are e/amples of some of thesecomponents5
6 road asset allocation
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
33/49
((
Portfolio Attrib!tion8contin!ed
Ho& do 'o! determine portfolio attrib!tion5
6 ).
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
34/49
(0
Portfolio Attrib!tion8contin!ed
6 0. "ompare 'o!r portfolio ret!rns in each asset
class to the benchmar# ret!rns of each inde/
6 Use ,eaching ,ool );: Portfolio Attrib!tion
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
35/49
(3
4h' is it important to attrib!te performance to
the portfolioGs components5
6 It can e/plain the difference in ret!rn based on
component &eights or selection
6 It can s!mmarie the performance differences into
appropriate categories
6 It can help 'o! #no& ho& 'o! are doing
4hat happens if 'o! donGt perform portfolioattrib!tion5
6 o! &ill not #no& &h' 'o! are performing as 'o! are
6 o! &ill not #no& ho& to improve
Portfolio Attrib!tion8contin!ed
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
36/49
(7
Portfolio Attrib!tion8contin!ed
4hat do 'o! do if 'o!r activel' managed
f!nds contin!e to !nderperform5
6 4atch them caref!ll'. Underperformance for a
month or D!arter is !nderstandable* b!t over )2$(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$(7 months
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
37/49
(;
!estions
An' D!estions on portfolio attrib!tion5
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
38/49
(=
Revie& of Objectives
A. %o 'o! !nderstand the different t'pes and
!ses of inde/es5
. %o 'o! !nderstand the Importance of
Portfolio anagement and Performance@val!ation5
". %o 'o! !nderstand portfolio rebalancing5
%. %o 'o! !nderstand ris#$adj!stedperformance meas!res5
@. %o 'o! !nderstand ho& to perform
attrib!tion anal'sis5
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
39/49
(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? $)1?
"ash )1? )1? 1?
Application: 4hen sho!ld the' rebalance their portfolio andho& sho!ld the do it5
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
40/49
01
"ase
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
41/49
0)
"ase
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
42/49
02
"ase
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
43/49
0(
"ase
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
44/49
"ase
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
45/49
03
"ase
Ret!rn 4eight 4eight Ret!rn
@D!it' 2.1? ;1? 71? 2.3?
onds ).1? 21? (1? ).2?"ash 1.3? )1? )1? 1.3?
"alc!lations and Application:4hat &as their over or !nderperformance5 4hat &as theircontrib!tion to sec!rit' selection and to asset allocation5 Ho&
did the' do for the D!arter5
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
46/49
07
"ase
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
47/49
0;
"ase
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
48/49
0=
"ase
-
8/10/2019 18 Investments 9 Portfolio Rebalancing and Reporting4279
49/49
09
"ase
performed the benchmar# b' .27? or 27 basis points
8).73?$).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.