Portfolio Monitoring and Rebalancing

Overview

Monitoring Performance and Risk

One of the critical tasks of an active asset allocation strategy is to monitor the performance of the fund and the estimated risks. This is critical to determining if the fund is on track to meet its objectives and whether it is complying with the risk tolerance initially set in the fund parameters.

At a minimum, fund managers should review period performance reports, estimated risk exposures, and performance versus benchmarks.

Rebalancing

Part of the portfolio strategy is some description of how the portfolio is rebalanced. That is, after the portfolio has been traded to match its target weights, movements in the prices of the assets in the portfolio will move the portfolio off its target weights.

The portfolio strategy will dictate when to re-balance the portfolio. Rebalancing the portfolio will have tranasction costs as well as tax implications, which will have to balanced against the higher expected returns from re-balancing.