Analysis of fixed and biased asset allocation rebalancing strategies

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.