Michael Blayney: It’s tempting to let it ride, but rebalancing is the smart play

Rebalancing is a critical part of portfolio management, and after a strong 2023 investors should take a moment to consider their asset allocation, says Pendal’s head of multi-asset MICHAEL BLAYNEY

• Rebalancing is a natural sell-high, buy-low strategy
• It better controls exposures, keeping risk at desired levels
• Browse all Pendal’s multi-asset funds

RIGHT now many investors will be chewing over whether to let high-performing investment settings ride in 2024.

It’s tempting. But Pendal’s head of multi-asset Michael Blayney believes it’s important to rebalance portfolios after a period of strong performance.

“It is very hard to do emotionally, because you’re rewarding the losers and penalising the winners,” Blayney says. 

“But in the long term, markets do exert a degree of mean-reverting behaviour.

“After a period of strong performance it makes sense to take some profits — and that’s what rebalancing is. 

“Rebalancing helps you make a bit of money out of that volatility. So if a market is down heavily you will be buying at that point — and selling when the market is rallying.

“You won’t time it perfectly, but over the long term you should make money.”

Benefits of rebalancing monthly

Rebalancing each month can provide about 30 basis points of excess return per annum over the weighted average assets that make up a portfolio in the long run, argues Blayney.

“And that’s after transaction costs. It is well worth doing because over time these small amounts compound,” he says.

Rebalancing also reduces risk because it keeps a portfolio within tolerances.

“If an investor had not rebalanced all last year, they’d be sitting on a portfolio that’s overweight equities and underweight bonds.

“They’d be running more risk now than they were at the start of the year, when equities were cheaper than what they are now.

“Rebalancing helps keep your assets in line with your desired risk profile,” Blayney says.

Remove emotion

Another benefit of rebalancing is that it takes some of the emotion out of investing. 

“It helps avoid behavioural problems, like wanting to bail from a stock or strategy that’s suffered a bit of short-term underperformance or wanting to load up on tech stocks given the extraordinary year they have just had.

“People start to believe that certain parts of the market will never do well, and certain parts are impregnable. But over long periods, these tend to even out and rebalancing helps address that sentiment.”

Technology stocks are a good example of why rebalancing matters.

The technology-heavy Nasdaq on Wall Street returned 55 per cent last year, which super-charged global equity returns. But that doesn’t mean it will happen again this year.

“You always get technological change. People tend to underestimate how much that happens over the long term.

“Faced with high uncertainty it makes sense to both diversify and trim parts of a portfolio which have risen strongly.”

Prepare a good defence

Coupled with a disciplined approach to rebalancing, investors should be careful to ensure the defensive part of their portfolio is high quality and liquid, Blayney says.

This should allow enough liquidity for expenses while taking advantage of opportunities as they arise.

“When markets do eventually have a downturn and a period of volatility, you don’t want to be sitting on a position where you came into the downturn running more risk than what your long-term strategy called for.

“For an adviser, it’s important to set the long-term strategy with the client.

“Review regularly – perhaps once a year. And if you do nothing else, rebalance because then you will naturally buy low and sell-high.”

About Pendal’s multi-asset capabilities

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

These include Australian and international shares, property securities, fixed interest, cash investments and alternatives.

In March 2024, Perpetual Group brought together the Pendal and Perpetual multi-asset teams under the leadership of Michael O’Dea.

The newly expanded nine-strong team will manage more than $6 billion in AUM and create a platform with the scale and resources to deliver leading multi-asset solutions for clients.  

Michael is a highly experienced investor with more than 23 years industry experience, including almost a decade leading the team at Perpetual.

Find out more about Pendal’s multi asset funds

Contact a Pendal account manager here