portfolio rebalancing
Family office portfolio rebalancing
Operations
Published on Simple September 7, 2022
Illustration: Marie Boye Thomsen

Table of Contents

Portfolio rebalancing is the buying or selling of assets to maintain the desired asset allocation in an investment portfolio. Portfolio rebalancing has always played a significant role in ultra-high-net-worth individuals (UHNWIs) and family office investment strategies, especially in the last 18 months, and will play a more significant role in the years to come.

1. A shift in private wealth management

As global markets move towards growth after the Covid-19 pandemic, it is clear that the pandemic has changed economies, individuals’ wealth, and how investors build and maintain their portfolios. Chris Hyzy, the Chief Investment Officer for Merrill and Bank of America Private Bank believes that “Investors will need a higher level of diversification, more frequent portfolio rebalancing and exposure to newly developing themes.”

Thomas Rappold, CEO of Divizend and co-founder of the Swiss unicorn, Numbrs, shares the same sentiment and pointed out that they were in a similar situation 20 years ago. When it comes to financial markets, certain assets were a lot more valuable than others, back then it was tech, media, and telecoms, while today it’s crypto. People that didn’t rebalance when the Nasdaq 5000 lost 80 percent of its value, lost a lot of their money.

“Rebalancing is a missed opportunity. Even though it’s mathematically really simple, in practice this is still a hassle, especially for retail investors that don’t have their portfolios aggregated.”
Thomas Rappold, CEO of Divizend

Keeping this in mind, it is important to explore portfolio rebalancing, the benefits, best practices, and reasons to consider it.

2. Portfolio rebalancing and why to consider it

When it comes to UHNWIs and family office investments, their portfolios are specifically created keeping their financial position, goals, and time frame in mind. Asset allocation, such as stocks and bonds, that provide a mixture of investment categories to balance risk and returns on investment.

Investment positions are affected by market movements that change the weighting of a HNWI or family office portfolio, increase risks, and can cause overexposure in certain asset classes or stocks. After this occurs, a review and rebalance is essential. Modern portfolio theory might be considered to ensure a structured portfolio based on risk appetite.

Rebalancing a portfolio is the act of buying or selling assets to restore target allocations or risk levels over time. Rather than focusing on maximising returns, rebalancing focuses on keeping risks at tolerable levels.

Apart from asset allocation, risk management and diversification, strategic rebalancing also helps to ensure that investments remain aligned with the UHNW or a family office’s short or long-term goals despite market changes.

3. When to rebalance your portfolio

Rebalancing has no threshold or frequency, but relies on investor preferences. Portfolios are traditionally reviewed and a rebalance is performed semi-annually or annually.  Global events or granular occurrences can drive the need for rebalances.

Hyzy advises investors to “Review portfolios more frequently to ensure that strategic allocations haven’t inadvertently shifted and rebalance where necessary.” Rebalancing can also include capitalising on new investment opportunities as they arise.

Apart from global events, such as the pandemic, there are granular events, such as organisational shifts from private to listed companies that can affect portfolios. Personal life changes, such as divorces, retirement or marriage can also increase risk tolerances which will facilitate rebalancing. Bill and Melinda Gates also faced the latter for consideration after their high-profile divorce.

Essentially, a portfolio should be rebalanced when it is necessary and the costs are valid.

4. Benefits of portfolio rebalancing

Investors must stick to their investment plans for successful investments despite market changes. Rebalancing helps to reduce or maintain risks at a tolerable level to achieve long-term goals.

Rebalanced portfolios might also retain their portfolio-level risk characteristics better than buy-and-hold portfolios.

With the vulnerable markets of today, it is easy for HNWIs and family offices to accumulate too many risks or avoid them and miss out on profitable opportunities. It is vital to stick to long-term goals, investments, and rebalancing with the purpose of achieving them despite market changes.

5. Portfolio management systems

Family offices use portfolio management systems to manage their investments. The software includes position integration, stimulation, cash flow, forecasting, and order integration, along with management capabilities, such as advice and order generation and tracking, making it easy for family offices to evaluate their investment strategies. However, some family offices find it challenging to implement the right technology into their operations. Keeping that in mind, here’s a ready-to-use guide to help do just that:

portfolio rebalancing

Don't rush the selection process

When it comes to choosing a family office portfolio management system, take the time to make the right choice and don’t choose any that has a shorter selection process. Invest time and resources in the requirement analysis.

portfolio rebalancing

Choose software with purpose

Shaun Parkin of Hall Road believes that finding a technology that has purpose and fits necessary systems is a significant challenge. “Gaining a true understanding of downstream impact is also a challenge,” he says. To overcome this challenge, it is vital for family offices to understand their actual  needs rather than their perceived needs. Being open-minded helps to choose technological suppliers that might not seem like the first choice, but can provide an insight into what is available and what can meet their needs.

portfolio rebalancing

Evaluate in-house and outsourced solutions

Complex portfolio management, accounting, and reporting platforms account for a substantial investment for a family office. The costs are exacerbated when solutions are required for trading, risk management, analytics and other investment functions. Family offices are often confused as to whether they should maintain their own technology infrastructure or find outsourcing partners to do the job so that they can focus on their objectives.  Outsourcing can provide cost savings as compared to traditional software licensing, implementation, training, and maintenance. It can also reduce the need for in-house IT staff.

portfolio rebalancing

Move beyond technology with cybersecurity

Security is still a challenge for family offices. Apart from the challenge of using new technologies, such as online transactions and cloud storage, there is also the risk of developing threats while using them. To overcome this challenge, family offices should rely on cybersecurity professionals to implement cybersecurity measures. Employees and family members must adhere to security protocols, and regular security checks and updates must be carried out as a part of the family office operations.

6. Bridging the generation gap

“One of the biggest generational differences is how people of different ages prefer to receive information. Older generations traditionally prefer paper copies of periodic reports, whereas younger generations have grown accustomed to having real-time information and interactive capabilities on demand,” says Aboude. Family offices need to find solutions that can deliver information in various formats. Utilising this knowledge in the research phase can help to bridge the generation gap and eliminate any potential issues later on.

With the knowledge of portfolio rebalancing and the use of technology, family offices and HNWIs can make the most of their investment strategies, reduce their risks, and focus on their long-term goals.

Dr Kevin Fleming Matina Agio Christian Schiede Emília Vieira

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