FYI: We know that investors should set a goal allocation and try to maintain it. In other words, they might choose 70 percent stocks and 30 percent bonds. Each of their investments will perform differently. When rebalancing a portfolio, investors skim from the profits of their winners, adding the proceeds to their lower performing asset class. This ensures that the investors maintain something close to their goal allocation.
By doing so, they can reduce their portfolio’s volatility. Sometimes, it can even boost returns. Most experts recommend rebalancing once a year. But if rebalancing were good, would more of it be better? Some people think so. They might rebalance once a quarter. Others rebalance once a month. But does this help, or is it more like flossing your teeth every hour?
Regards,
Ted
https://assetbuilder.com/knowledge-center/articles/should-investors-rebalance-their-portfolios-more-than-once-a-year
Comments
An example. As we entered May I was equity heavy; and, I reduced my allocation to equities raising my allocation to cash. As equities pulled back in May I did a little buying but staying well within my asset allocation ranges, of course. So, thus far, this has worked well for me playing the swing as the Index has had better than a 7% movement during May (high to low) and has now recovered in June reaching a new all time high. Old_Skeet's market barometer is a tool that I developed and I use to assist me with market calls along with using it to help me throttle my equity allocation. As of market close June 20th, it scored the S&P 500 Index as extremely overbought. When I began to buy during the weeks of May 20th and May 27th the barometer indicated that stocks were undervalued with week ending readings of 155 and 158 respectively. Perhaps, now might be a time, for me, to take a little off the table and book some profit since the S&P 500 Index reached a new all time high and by the metrics of the barometer stocks are now extremely overbought with a barometer reading of 133. Generally, a higher barometer reading indicates there is more investment value in the Index over a lower reading.
Currently, my cash bubbles at 14% so I'm strongly thinking of selling some equity and raising my cash allocation since historically, stocks tend to go soft during the summer months. And, there will be, in time, another swing movement that I can play. But, to do so ... I'll need some cash. So, for me, it is now time to rebalance and reload the cash area of my portfolio.
So ... How often should you rebalance? I'm thinking when it is warranted.
DSEEX (summary prospectus): the Fund’s total investment exposure (direct investments in debt securities plus notional exposure to the Index) will typically be equal to approximately 200% of the Fund’s net asset value.
BIVRX can be viewed as using 90% of the money invested in it to buy equities (80% domestic, 10% foreign) and keeping 10% in cash like a conventional fund, but then also shorting 63% of its NAV. When it shorts that equity, it receives cash. Hence the 10% + 63% = 73% cash position. Hence also the high ER: for borrowing the securities to sell short, and to cover the dividends that would have gone to the lender of the securities.
While it's placing just a modest bet (27% NAV) on the market going up, it is simultaneously placing outsized bets on individual securities - 90% of its NAV on stocks it is betting will go up, and 63% of its NAV on differentstocks it is betting will go down. The dollars add up to a small net equity position (small bet on the market as a whole), but the individual security exposure is magnified (90% + 63%).
That's as misleading as showing DSE_X as half bonds+cash, jeez; M* is so messed up in this.
See
https://www.mutualfundobserver.com/2019/05/balter-invenomic-bivrx-bivix-bivsx/#more-12776
Thought I would give it a try.
Likewise, the portfolio breakdown summarizes common stock at 95.2% long and 64.2% securities sold short. That's about 31% net long. Again, not an exact match for the current 27%, but in the same ballpark.
This seems straightforward. What strikes you as misleading?
Does that seem reasonable, much less inferentially accurate, to you?
Look at the past queries here about DSE_X and whether comprehending its holdings as half bonds+cash leads to a proper understanding. Wow, your family asks you, how can a fund so composed track but outperform the SP500 all the time?
BTW, that's the same coefficient of determination that portfolio visualizer shows for VWELX wrt VFINX. If one were to leverage Wellington to the hilt, one might expect it to similarly outperform VFINX.
Anyone considering DSENX who has to ask how it could outperform the S&P 500 shouldn't be investing in it. Either they don't understand leverage, or they haven't read the prospectus: "the Fund’s total investment exposure ... will typically be equal to approximately 200% of the Fund’s net asset value." (There's also the fact that it tracks a different index, but we'll disregard that for the purpose of this discussion.)
That's not to say people shouldn't be improving their understanding before investing. Speaking of which, would you care to address @dryflower 's question: " I would it expect it to be less volatile than the market and that it would resist downdrafts better. Why don't the numbers play out this way? The downside capture ratios are all slightly greater than 100%. " (Another way of asking why beta > 1.)
https://mutualfundobserver.com/discuss/discussion/comment/114412/#Comment_114412
The annual report for BIVRX says that the the fund has cash adding up to about 70% of its net assets. If your concern is that people are being mislead by legal filings and accounting conventions, then suggest something better to the SEC and/or the FASB. Because all M* is doing is transcribing this data. You're shooting the messenger.
Think about market neutral funds, just a special case of long/short funds where net security assets are (close to) 0%. "anyone reading it might be, indeed would be, led to think they were buying a fund which was [100%] cash, and would perform and might be expected to perform like a fund [of pure] cash. Does that seem reasonable ...?"
It does not seem reasonable to me that people looking at market neutral funds would expect them to perform like cash. They are faced with the fact that these funds do exist. Either these funds are all shams that really are nothing but (high priced) cash, or there's something going on with shorting that goes beyond the net cash percentage.
http://portfolios.morningstar.com/fund/summary?t=DSENX®ion=usa&culture=en_US
and is supposed to parse out at a high level (or any level) what sort of beast this is.
45% bonds, it says. Nothing listed under market cap or holdings style. Benchmark is Russell 1000. Check those wack style boxes for 2016 (LB) and 2018 (SV!), missing other years. Equity % is always under half. (So maybe it's a balanced fund?) Equity % jumped more than 50% 2017-'17.
And you would just tell them, Well, all M* is doing is transcribing, nothing to criticize here as misleading. Or confusing. Or unclear.
All righty, then.
FWIW ... For those that own the subject fund.
One of the things that concerns me about this fund is the third party risk that it is no doubt carrying. Does that not concern you? Remember Bear Sterns carried a lot of third party risk paper (got margin calls they could not cover) and they are no more. A lot of the securities that it holds are of paper form, thus they have to hold a large cash position, much like a commodity strategy fund that I own does to cover its commodity paper. But, it is a very small portion of my portfolio.
I'm thinking you are taking on more risk than you realise ... and, for what? Inorder to beat the 500 Index. So what! If it is beating the Index then is it not taking on more risk? Yes, for it is indeed levered up.
Perhaps, you are short of assets and need to be aggressive? Or, are you just being cavalier? What is your underline reason for owning this high risk fund? If it blows up will you still be around?
I'm not sure even M* understands the fund due to the massive amount of paper it holds.
http://portfolios.morningstar.com/fund/holdings?t=DSEEX®ion=usa&culture=en-US
I am Old_Skeet ... and, I've been around long enough to see and smell risk.
All this is why I don't invest in things I don't understand, like this one. Just give me a nice balanced fund with stocks and bonds. Not to say some of those don't have extra ingredients too. PRWCX for example. But that comes with a more than credible record.
While I'm sure many people stick to percentage-based allocations (and that's fine if they do - who am I to judge) the cynic in me wonders if the idea of rebalancing was developed to generate commissions to brokerages and churn accounts.
The only thing I'd worry about having "too much of" is idle cash. But that's a good problem, even on a bad day.
As someone who is heavily invested in this fund, you have surely reviewed the financials as well as the prospectus and SAI, and you understand what you have bought. No need for a "Cliff Notes" description. So perhaps you can fill the rest of us in and describe what the fund's equity style box should look like. And address dryflower's puzzlement over why the fund's volatility is so high.
Just a suggestion here: you might start by explaining to the uninformed what the difference is between notational and market value, and what you feel would be an appropriate numeric representation on a Morningstar page.
The notational value of the fund's swaps is roughly $5.8B (as of the date of the annual report). That is about the same as the net assets invested in bonds. Precisely what the prospectus says: 100% actual bond investment plus 100% notational equity exposure. 50/50. Just as M* reports.
But you say that this is misleading. Or confusing. or unclear.
Should Morningstar instead report the market value of assets? That would be $5.8B in bonds and $228M in swaps, i.e. roughly 100% in bonds. No, I suspect you'd say that my family would get confused by this. If they couldn't understand how a 50/50 fund, leveraged though it might be, could outperform the market, then they surely couldn't understand how a fund with nothing but bonds and a smattering of derivatives could do so.
So please, let me know how I should explain this fund to my family. Preferably without appealing to alternate facts, like saying that the fund owns equity.
Dissecting the cash only takes a minute. Trying to explain it here takes a lot longer
I'll try a one minute sketch again, and hope for the best:
I have $100. I buy $100 of Coke (KO). I sell $100 of Pepsi (PEP). I've now got $100 back in my pocket.
Suppose the beverage industry moves in tandem. Both stocks move up 10%. I'm up $10 on KO and down $10 on PEP. A wash. Same if beverages drop 10%.
Suppose instead that KO goes up $10 and PEP drops $10. I've now made a 20% profit. Because I bet the right way. If everything goes against me, I'm down 20%. All this, even though I'm still holding my original $100.
It's a simple example. My portfolio is 100% net cash ($100 in cash, $100 KO, -$100 PEP). I have 0 exposure to the beverage market, but large exposure to individual stocks. Understand this and you understand long/short funds.
>> I'm thinking you are taking on more risk than you realise ...
may be
>> and, for what? Inorder to beat the 500 Index.
sure
The last 5y, if I had been 50-50 (or whatever) in IVV and FTBFX instead of DSEEX and PONAX (also a bit of a derivatives black box, arguably), I would be behind >10% of where we now are, which to us is a significant difference. Would be 10% behind having been in JABAX all that time.
Seemed worth it.
>> So what! If it is beating the Index then is it not taking on more risk? Yes, for it is indeed levered up.
Perhaps, you are short of assets and need to be aggressive? Or, are you just being cavalier? What is your underline reason for owning this high risk fund? If it blows up will you still be around?
There is no little negative press about it and CAPE. This from 10/13:
https://www.etf.com/sections/blog/20177-inside-professor-shillers-cape-etn.html
and this from just last fall, CAPE, Seeking Alpha:
ETNs do not own any of the underlying assets, instead, it's merely an IOU from the bank or issuer saying "we agree to pay you the starting value of this note + any changes in the index tracked". An ETN is considered an unsecured debt obligation, meaning that if the issuer ends up bankrupt, you could lose your investment.
The issuer of the CAPE ETN is Barclays Bank PLC (BCSPRD), who have had their credit rating cut this year from Baa2 (equivalent to BBB) to Baa3 (equivalent to BBB-) by Moody's, which is the lowest investment grade rating, ...
Lipper otoh gives CAPE a 5 on everything, but no holdings info. Their info listed on DSEEX is as layman-unhelpful as M*, style G&I, category LCV, holdings 93% bonds+cash, so you would have to delve to comprehend, and read msf's excellent analyses.
@msf
>> Preferably without appealing to alternate facts, like saying that the fund owns equity.
It is not I but the non-misleading, non-confusing, non-unclear M* which indicates this alternate fact, in the AA and Details sections on the page I linked, DSENX going reportedly from 30% equity 3y ago to just under half equity today, while passing through SCV style last year.
I'm with you all the way on that point.
So ... so far so good.
Thanks to another Snowball writeup. (I sent another modest check to MFO.)