Why We Rebalance Quarterly


A client recently asked us if our equity strategies would perform better if rebalanced monthly rather than quarterly. The rationale is that some companies are falling below the sell threshold of 70% between each rebalancing date and yet we are keeping them for the next 1-3 months. In this article, we explain why we chose to rebalance quarterly with the following arguments:

1. More Value Added
When we created our equity strategies 5 years ago, we made the effort to compare the output of both rebalancing frequencies. As of December 31th 2019, we performed those backtests again on all our equity strategies. Please find below our findings for the period of 2000 to 2019:

Annualized Return (%)CANUSLINTCAD

The annualized return over the last 19 years is lower across all strategies when we rebalance monthly. This is probably caused by the implicit costs of trading (slippage) but also the increase of useless churning such as a stock being sold and being bough back again shortly after.

2. Low Portfolio Turnover
Low portfolio turnover is one of the four pillars of our investment philosophy as we strive to maximize the returns for our discretionary PMs and their end investors. As expected, there’s more churning when rebalancing monthly as the portfolio becomes more sensitive to noise:

Portfolio Turnover (%)CANUSLINTCAD

This is seen in the portfolio turnover table above. On average, the portfolio turnover is about 36% higher when we are rebalancing monthly instead of quarterly. Also, let’s not forget the tax consequences for trading more often. In other words, we are not rewarded for acting faster.

3. Client’s Preference
The majority of our prospects and clients do not like to rebalance too often for two reasons. First, monthly rebalancing creates more work by giving more trades to be executed and monitored. Second, more trading is costly for whoever pays for the trades: the advisor, the firm or the client. Those additional trade also negatively affect the performance of all accounts.

For the all the aforementioned reasons, we will keep our quarterly rebalancing schedule. We staggered the rebalancing months to avoid having two rebalancing in the same month. However, the Canadian High Dividend Strategy (CAD) and the Best Ideas Strategy (BES) are exceptionally rebalancing on the same month as the Canadian Large Cap strategy (CAN).

As usual, if you have any questions concerning rebalancing or suggestions of future research topics, please feel free to let us know. We are here to help you grow your business.

The Portfolio Management Team