I am putting my own portfolio through a rebalancing exercise. I only do this once a year. The basic concept is to take profit for your winners, put some of the profits into your loser or laggard markets, and also, ensure that you don’t have too much into one particular area.
Looking at my portfolio. I remember that at the start of the year, I made a conscious decision to avoid US totally, more or less avoid Japan, and focus on Asia with some exposure into Europe. The strategy has paid off in 2009, as Asia led US and Japan markets by a mile. All the Asian funds have done at least over 50%, if not more, while the Japan fund is up 28%. I looked up the US equity funds on the fund selector and none of them did better than 34% over one year. The Europe funds I had though, did well, keeping pace with the Asian equity funds over one year.
However, its been one year in such an extreme position. Its time to move back to a slightly less extreme position. However, if you were to ask me, I would still say I favor Asia at this stage, though I also like Emerging markets as well. I am still rather iffy about Japan and US, but that’s the point about rebalancing, it forces you to put money even into areas you might not like. So, I came up with a new target allocation for my core allocation. Previously, the 60% I had in my core portfolio had 6% in Europe, 0.2% (negligible) in Japan, nothing in US, and 54% in Asia, including Singapore. My new target allocation would have 10% in Europe, 5% in US, 5% in Latin America, 5% in Japan, and the rest in Asia (35%)
Within my bonds portion, I wanted its total to make up 15% of my portfolio. As I made sure to add a portion of my new investments into my bond funds, and as the bond funds I choose this year had pretty eye popping returns over one year, they were actually not too far behind many of my equity funds. (Fidelity high yield bond fund was up 72% over one year, Fidelity US high yield was up 36%, and INF emerging market was up 64%). I was clearly too heavy into emerging market bonds though, so I decided on a final allocation of 4% into US high yield, 3% into Europe high yield, and 8% into Emerging Market Bond. So, I would be shifting some profits into my bond funds, and the US high yield bond fund would receive a bigger proportion since it was clearly the laggard.
Now, we come to my supplementary portfolio. This added up to 17.5%, and had seven funds in it! Three of these, the India, Russia and Indonesia fund had a return of 124%, 99%, 94% over one year. The South Korea fund and China fund were the laggards. Looking at South Korea, I found that I liked the valuations of the market, and its earnings growth for next year. Its one of my favorite markets for next year, so I decided to overweight it. Hence, I took profit on Russia, Indonesia, Asian financials, and added most of it all into South Korea. I left the precious metals fund and HGIF Chinese Equity alone as they were close to where I wanted their allocation to be.
I also left my CPF funds untouched as at this stage, I couldn’t add to them, and I was comfortable with their allocation.
My final portfolio had a target allocation that looked roughly like this:
| Core Portfolio | |
| Parvest Europe Alpha EUR | 5% |
| FLF equity Emerging Europe | 5% |
| LionGlobal Japan Growth | 5% |
| Aberdeen Pacific Equity | 25% |
| Aberdeen Asia Smaller Cos | 5% |
| Aberdeen Singapore Equity | 5% |
| Schroders Latin America | 5% |
| FLF Opportunities USA | 5% |
| Bonds Portfolio | |
| Fidelity Europe High Yield Bond | 3% |
| Fidelity US High Yield Bond | 4% |
| INF RF Emerging Market Debt | 8% |
| CPF Portfolio | |
| AIGIF Acorns of Asia | 7% |
| Lion Capital Balanced Singapore | 1% |
Supplementary Portfolio | |
| HGIF Chinese Equity | 3% |
| LionGlobal Korea | 4.5% |
| HGIF India | 1.5% |
| FLF Russia | 1.5% |
| Aberdeen Indonesia | 2% |
| DWS Noor Precious Metals | 1.5% |
| Fullerton Asian Financials | 3% |
| Total | 100% |
This actually looks like a lot of funds, and indeed, there is no necessity to have quite so many if you don’t wish to. A much simpler portfolio with a similar allocation would look like this:
| Aberdeen Asia Pacific Equity | 46% |
| Global Equity Fund | 23% |
| BRIC Equity Fund | 11% |
| Global High Yield Bond Fund | 7% |
| Emerging Market Bond Fund | 8% |
| LionGlobal Korea | 5% |
So, there you have it. Once you have established what kind of target allocation you want to have. To get to it just involves making the various switches to adjust to the new allocation. Don’t sweat the small amounts. For example, if you find you want adjust something from 5.5% to 5%, and it involves switching a very small amount, then don’t switch, it won’t make that much of a difference either way. It does not have to be a strict rebalancing either. I personally continue to have a heavy bias towards Asia, and it shows in my portfolio. But what the exercise does, is that it forces me to take some profit from Asia, Russia, India and add to some areas which have underperformed, like US, Japan, South Korea. Sometimes, these decisions, forced upon us by rebalancing, can be very surprising in their results. For instance, this year I never expected my high yield and emerging bond funds to do quite as well as they did this year, nor did I expect my Europe funds to actually keep pace with many of my Asian equity funds as well. I will update my portfolio when all the switches have been put through and updated in my holdings.
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