UK - Pension funds with balanced mandates could allow investments to drift further from the benchmark on many occasions and still achieve the desired returns rather than go through a costly benchmark rebalancing process, says Scottish Widows Investment Partnership (SWIP).
SWIP, the asset management arm of Lloyds TSB, conducted a study to examine the optimal time frame for funds to consider re-balancing the benchmark of their portfolio.
Commenting on the study, Gary Williams, head of investment performance and risk at SWIP, said: “Our experience shows that most mandates will not clearly state the re-balancing frequency, which leads to the benchmark being fixed throughout time.
“This of course is inconsistent with the fund, which will move with the market and forces the fund manager to continually re-balance the fund to maintain their preferred active position.”
Using two different scenarios – a benchmark reflecting the asset mix of a “fairly typical UK balanced pension fund” and allowing the weights for each asset class to drift from the benchmark by 10% to 20% - SWIP simulated returns for 50000 different portfolios covering January 1987 to August 2004.
SWIP said the benchmark returned 8.9% per annum with the return most frequently produced being 9% for both distributions and the mean average return also 9%.
Williams said: “A key observation to make from the distribution of returns across these portfolios over this period, is the narrow range of returns achieved from both scenarios. The study has shown that even if a 20% drift is allowed over the period, the end results would have been very similar to the return achieved by the benchmark.”
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