Within a one-year period, the market value of each asset in a portfolio must have earned a different return, resulting in a weight change. Thus, portfolio rebalancing has become a necessity.

Rebalancing helps to buy and sell a portion of the portfolio to set each asset class or stocks within a fund back to their original target allocation. It is about staying true to the fund’s investment objective by realigning the weights of the securities in the portfolio to ensure better risk control and that the fund is not overly dependent on the success or failure of a particular stock.

Rebalancing enables the fund manager to do away with the underperforming assets/stocks from the portfolio and invest in ones with better growth potential while maintaining the right allocation mix. The process thereby helps investors dispose of investments that are no longer in line with their goals.

As we can see, the stock market benchmarks, the Sensex, and the Nifty have made a good comeback from the lows seen in March, mainly due to the strong influx of global liquidity that has pushed up the stock markets. Investors must look at PMS strategies that have clear investment frameworks and stock selection and allocation models.

Investors can research and seek expert advice to find PMS strategies with unique stock selection and evaluation processes, which are mainly backed by effective risk management modules that help to systematically eliminate selection and allocation biases that fund managers are easily vulnerable to.

A PMS strategy should majorly focus on achieving an equal-weight portfolio using a proper investment methodology.

Fund managers can plan to start with the universe of all the listed companies, applying progressive filters based on attributes such as market cap, earnings (strong past track record and future growth prospects), core investment framework (leadership team and management credentials), and valuations (market share, price/earnings to growth ratio). This kind of discipline helps the fund manager to stay focused on his/her core strengths and avoid any distractions.

To mitigate allocation bias, equal weights should be allocated to companies irrespective of their market capitalization. The portfolio should involve balancing the weight allocation on every performing stock by avoiding lesser allocation to high-performing stocks. The portfolio also needs to be monitored with a forced cost-averaging and rebalanced at regular intervals.

One of the Alphas generating strategies worth considering is a large and mid-cap-oriented strategy, which focuses on investing in high-quality companies with long-term sustainable growth, driven by dominant leadership positions in their respective segments. The strategy centres around delivering long-term superior risk-adjusted returns to investors and is positioned to be a core allocation in client portfolios.

The strategy invests across sectors and companies (not exceedingly more than 15 stocks) which are slated to benefit from the investment themes of Value Migration and Growth in Domestic Consumption. Industries need to be identified where value migration is underway and picking potential winners early in the investment cycle. In the second theme, companies can be picked based on the potential to benefit from GDP growth and the attendant impact on domestic consumption-driven sectors.

Today, we are amid a pandemic that has resulted in an economic contraction, rising unemployment, and a lot of uncertainty in almost every aspect of our life and investments. Many investors are wondering whether the buy and hold approach is feasible or is it time to reassess the approach.

Fund managers should strongly believe that risk and uncertainties are a part of every emerging market, and in India, everyone is witnessing and experiencing these kinds of risk over a longer period. In the past, markets have been observed to still evolve and perform amid uncertainties. One needs to stick to their risk management frameworks, where equal-weighted portfolios are managed and periodically stocks are also rebalanced to mitigate the allocation bias.

The primary goal of a rebalancing strategy is to minimize risk relative to a target asset allocation rather than maximizing returns. Over time, superior returns are achieved if the proper focus is given to the portfolio’s asset allocation. Rebalancing helps the best stocks stay in the portfolio in contrast with a ‘buy-and-hold’ strategy where one is unaware of the potential losers in one’s portfolio.