A Re-balancing Question

[OLTB]

Morning All,

My question relates to the part of my portfolio invested in passive funds. The portfolio currently look like this:



For those that are not familiar with all of the EPICs in the investment world the funds are as follows:

VWRL: Vanguard FTSE All-World
VVAL: Vanguard Global Value Factor
WOSC: SPDR World Small Cap
VFEM: Vanguard FTSE Emerging Markets
SEMS: iShares Emerging Markets Small Cap
IWDP: iShares EPRA/NAREIT Developed Markets Property Yield
SLXX: iShares Core GBP Corporate Bond
CRPS: iShares Global Corporate Bond
SEMB: iShares Emerging Markets Bond
UTIP: SPDR US TIPS

The spread of assets has been selected using the asset allocation suggestions of Tim Hale.

Now, I would like to re-balance the portfolio on an annual basis and I get the idea of capturing the growth from those assets that have grown in value to an extent that their value as a percentage of the portfolio is higher than the target allocation. This 'excess' would be re-distributed amongst the assets that have fallen below their target in the asset mix and are 'cheaper' when assessing against the portfolio value as a whole. As an example, if VWRL's value was at 40% rather than the target of 36%, I would sell 4% of VWRL and re-distribute to the corresponding asset(s) that have fallen 4% behind.

After this waffle, the question - if I were to add 4% of the portfolio overall value in 'new' money to the assets that have fallen behind (from bank account savings or by re-investing dividends generated from my HYP), rather than selling the outperforming asset (as in in the above example with VWRL) is the result the same? I don't mean to appear thick, but is it better (horrible word, I know) to capture growth and re-distribute, or 'run the winners' and top-up from outside sources.

It may be that I'm over-thinking matters and it doesn't really matter what option I choose as long as the asset allocation is maintained.

Any suggestions are very welcome.

Cheers, OLTB.

[tjh290633]

After this waffle, the question - if I were to add 4% of the portfolio overall value in 'new' money to the assets that have fallen behind (from bank account savings or by re-investing dividends generated from my HYP), rather than selling the outperforming asset (as in in the above example with VWRL) is the result the same? I don't mean to appear thick, but is it better (horrible word, I know) to capture growth and re-distribute, or 'run the winners' and top-up from outside sources.

It may be that I'm over-thinking matters and it doesn't really matter what option I choose as long as the asset allocation is maintained.

Any suggestions are very welcome.

Cheers, OLTB.

Of course the result is similar. You just avoid some needless trades. Once you get to the stage that you are not adding capital each year, then it makes sense to do your rebalancing by trimming the overweight and adding to the underweight positions, unless you are content to let nature (i.e. the Markets) takes it course and deviate from your original weightings.

TJH

[forrado]

I don't mean to appear thick, but is it better (horrible word, I know) to capture growth and re-distribute, or 'run the winners' and top-up from outside sources.

To paint a brief picture; I run two portfolios. One is a substantial ISA, the income from which supplements my state and DB pensions. While the other is a SIPP that remains in situ until some later to be decided date, operating on a total return basis. The majority holdings of both portfolios are actively managed investment trusts with a few UTs / OEICs in there for regionally focused reasons.

So, in terms of my SIPP, I have personally opted to ‘run-the-winners’ and use internally generated dividend receipts (currently circa 3.5%) to periodically upwardly adjust the laggards. However, I’m not married to my allocation targets so to speak. For things can change just as relationships can, and as a result if I turn either positive or negative on an asset class or geographical region I’m not afraid to shift positions. For example re: BREXIT. Since the vote my SIPP portfolio's equity exposure to the UK has been cut by 15% (from 40% to 25%) in favour of 7.5% mainland Europe (up from 15% to 22.5%) and equally 7.5% the Far East & Asia Pacific (up from 12.5% to 20%). Plus previous exposure to UK infrastructure is now zero in favour of a position in non-UK private equity. While my ISA holds UK commercial property for income reasons, my SIPP no longer does.

[hiriskpaul]

To be pedantic, if VWRL's value was at 40% rather than the target of 36%, you would need to sell 10% of VWRL to rebalance, not 4%, but I understand what you mean.

The idea of these lazy-ETF type portfolios is to keep them rebalanced to maintain a fixed diversification. There is a small rebalancing benefit that can be expected, but that is a secondary consideration and likely to be small, especially for correlated assets. So topping up underweight ETFs using new cash and dividends achieves the desired result of keeping the portfolio balanced (roughly balanced) without the expense involved from selling. Personally I would not bother topping something up if it resulted in a trade of less than £2,000, assuming a £5 trade fee. Instead I would prefer to overweight one of the underweight positions rather than run the expense of getting positions exactly right. I am sure Hale's book will have some guidelines on this, including threshholds for selling.

By the way, VWRL includes Emerging Markets. The developed markets ETF is VEVE and is 0.07% cheaper than VWRL. If you are interested, the TER of Vanguard's EM bond ETF (VDET) is much lower than iShares as well. VDET is 0.25%, SEMB 0.45%.

[OLTB]

To be pedantic, if VWRL's value was at 40% rather than the target of 36%, you would need to sell 10% of VWRL to rebalance, not 4%, but I understand what you mean.

The idea of these lazy-ETF type portfolios is to keep them rebalanced to maintain a fixed diversification. There is a small rebalancing benefit that can be expected, but that is a secondary consideration and likely to be small, especially for correlated assets. So topping up underweight ETFs using new cash and dividends achieves the desired result of keeping the portfolio balanced (roughly balanced) without the expense involved from selling. Personally I would not bother topping something up if it resulted in a trade of less than £2,000, assuming a £5 trade fee. Instead I would prefer to overweight one of the underweight positions rather than run the expense of getting positions exactly right. I am sure Hale's book will have some guidelines on this, including threshholds for selling.

By the way, VWRL includes Emerging Markets. The developed markets ETF is VEVE and is 0.07% cheaper than VWRL. If you are interested, the TER of Vanguard's EM bond ETF (VDET) is much lower than iShares as well. VDET is 0.25%, SEMB 0.45%.

Thank you hiriskpaul - that's a very useful post for me.

Cheers, OLTB.

[Hariseldon58]

Some good suggestions regarding re balancing, the frequency is probably not important at all, minimising costs by using new funds to top up the under weighted sectors is pretty sensible.

I helped set up a small portfolio for an older gentleman , circa £25k about 20 years ago, the gentleman in question does not like to bother much with it and the portfolio has never been touched apart from most of the income being reinvested. The bond equity mix is pretty similar to the start point (this has surprised me, the Bond component has done far better than I ever imagined at the time) the portfolio is nicely into six figures now and whilst I would have liked to swap funds for lower charging alternatives the results from doing nothing have been pretty good. The takeaway from this is that we all feel we need to do something when perhaps the answer is not to worry too much and leave well alone !

[Itsallaguess]

The takeaway from this is that we all feel we need to do something when perhaps the answer is not to worry too much and leave well alone !

I find that if I mentally class 'Leaving it well alone' as actually 'Doing something', in terms of it being a process that's actually 'carried out', then I'm able to 'do' that a lot easier....

Cheers,

Itsallaguess

[OLTB]

By the way, VWRL includes Emerging Markets. The developed markets ETF is VEVE and is 0.07% cheaper than VWRL. If you are interested, the TER of Vanguard's EM bond ETF (VDET) is much lower than iShares as well. VDET is 0.25%, SEMB 0.45%.

VWRL is now VEVE!

The takeaway from this is that we all feel we need to do something when perhaps the answer is not to worry too much and leave well alone !

That's what I aim to do - it's an extension of Itsallaguess's, 'No look November'!

Cheers, OLTB.

[Itsallaguess]

The takeaway from this is that we all feel we need to do something when perhaps the answer is not to worry too much and leave well alone !

That's what I aim to do - it's an extension of Itsallaguess's, 'No look November'!

Coming soon to an investment-website near you -

'Daren't Look December!!'



Itsallaguess

[kempiejon]

Just leave it January and Forget about it February.
Nothing to see here, Move along March,
Agnostic April.

[OhNoNotimAgain]

The trade-off between tracking error and portfolio turnover, i.e is the extra cost of trading to minimise tracking error, is a hugely important topic for fund managment.

However, it has largely been ignored which is why I proposed an MBa student study and quantify it.

The conventional view is that is that tracking error should be reduced to the absolute minimum and not to worry about trading costs. within reason, or the impact on returns.

The results are very interesting and suggest that this is not always the case.

[BrummieDave]

I don't mean to appear thick, but is it better (horrible word, I know) to capture growth and re-distribute, or 'run the winners' and top-up from outside sources.

To paint a brief picture; I run two portfolios. One is a substantial ISA, the income from which supplements my state and DB pensions. While the other is a SIPP that remains in situ until some later to be decided date, operating on a total return basis. The majority holdings of both portfolios are actively managed investment trusts with a few UTs / OEICs in there for regionally focused reasons.

Forrado, I'd be interested in your choice of ITs in both portfolios please, the income based ISA, and total return SIPP. If the mods conclude that question can't be asked/answered in this thread on this part of the board, but you are willing to share, please message me directly. Thanks in advance.

BD

[tjh290633]

If this is not the correct forum, then nothing is. If it is IT related, then it belongs here, but might usefully have a cross-reference on the IT forum

TJH