LT Views Winter-2025-SINGLE-build08 - Flipbook - Page 13
THE ART
OF
We often talk about the importance of long-term investing, focusing on the
fundamentals and ignoring short-term market noise. This does not mean, however,
that investors should necessarily adopt a buy and hold approach. Actively
rebalancing portfolios also has an important role to play in long-term investing.
Maintaining asset allocation
Actively rebalancing means regularly
trimming or adding to particular asset and
sub-asset classes to bring the portfolio back in
line with the original target asset allocation.
In practice, this usually means reducing
some of the weighting to the winners and
increasing the weighting to investments that
have performed less well. Rebalancing can
either wholesale move back to the target
asset allocation or move part of the way
back towards the target weights. This should
mean rotating some of your investments out
of assets that have become more expensive
into ones that have become cheaper.
There are several reasons why it is beneficial
to maintain the original target asset allocation.
Matching risk tolerance
Matching portfolios to their risk tolerance
levels is a key starting point for investors
and the strategic asset allocation (SAA) and
the tactical asset allocation (TAA) plays an
important role in meeting this. The Liontrust
Multi-Asset team takes a medium-term view –
12 to 18 months – of the prospects for each
asset class and this forms the TAA. Each asset
class is assigned a rating from one to five,
with one the most bearish and five the most
bullish. In portfolio construction, our TAA is
combined with the SAA, manager selection
and mandate parameters to create holdings
targets for each of our funds and portfolios.
Over time, with some investments rising in
value and others falling, the current asset
allocation will no longer match the original
target asset allocation. This can increase or
decrease the level of risk of the portfolio and
therefore no longer be in sync with that of
the investor.
those that have underperformed (and might
be relatively undervalued).
Rebalancing works best in diversified
portfolios with imperfectly correlated assets.
For example, in the late 1990s technology
boom, those investors who sold down their
overvalued stocks and bought undervalued
assets lagged as the tech bubble built but
this reduced the negative impact from the
subsequent bursting of the bubble from 2000.
On this basis, we are currently positive on
UK, Japanese, emerging markets, Asia exJapan equities, US small caps and investment
grade and developed market high yield
bonds. We are negative on European
equities and cash.
Enhancing returns
Rebalancing also enables investors to
take advantage of valuation opportunities
where there is a belief that investments have
become relatively expensive or cheap.
Through rebalancing, it is possible to reduce
the weighting to those investments which
have performed well (and might be relatively
overvalued) and increasing weighting to
In the Global Financial Crisis (GFC) in
2008, equities plummeted while bonds
performed relatively better. Investors who
rebalanced their portfolios by buying
equities at increasingly low prices by
selling down the bonds that had swollen in
their allocation as a result were well placed
to benefit when markets later recovered.
One
important
consideration
when
rebalancing is the cost of doing so; there
are transaction costs every time investments
are bought and sold.
The decision on whether to rebalance
towards the original target asset allocation
and the degree to which you do so are active
decisions. They will potentially impact the
ability to meet an investor’s risk profile and
enhance returns.
LIONTRUST VIEWS – WINTER
13
