Analysis of fixed and biased asset allocation rebalancing strategies

Abstract

Purpose

Over the years a number of tactical, dynamic and strategic approaches for asset allocation have been developed to improve the objectivity of portfolio management. One of the most popular approaches is to annually rebalance a portfolio of six to ten assets classes back to an equal or fixed percentage. Most researchers agree that this is essentially a contrarian strategy. The purpose of this paper is to develop and evaluate an asset allocation methodology using a biasing factor that can implement a momentum strategy for investors who might prefer momentum investing.

Design/methodology/approach

Three portfolio strategies, buy and hold, equal rebalancing and bias factor rebalancing are compared using 20 years of performance data and a diversified set of eight asset classes. The biased approach is then tested using two years of data not included in the original analysis data.

Findings

This research demonstrates that there is a wide range of active rebalancing approaches that can easily implement either a momentum or a stronger contrarian strategy. In addition, the findings present considerable evidence that a partial or full biased momentum approach can result in improved portfolio performance with reduced risk over longer time periods.

Practical implications

The results for buy and hold show that the traditional equal rebalancing strategy may not be worth the extra effort required to implement it.

Originality/value

Even though the full momentum approaches are less diversified than the buy and hold or the equal rebalancing strategies, it resulted in superior risk-adjusted returns as measured by the Sharpe ratio.

Citation

Mattei, M.D. and Mattei, N. (2015), "Analysis of fixed and biased asset allocation rebalancing strategies", Managerial Finance, Vol. 42 No. 1, pp. 42-50. https://doi.org/10.1108/MF-10-2015-0264