Funds Could Boost Expected Rates of Return

Fiduciaries may be overlooking a “very simple and lucrative source of expected returns,” according to a recent article in Chief Investment Officer.

The article explains how fund return forecasts are based in part on Strategic Asset Allocation (SAA) by projecting a static SAA for a given level of risk. But market movements cause a portfolio to “drift around its SAA, so when approving an SAA policy, a board also approves allowable policy ranges before a rebalancing is triggered.” Such policy ranges, the article argues, are typically viewed from a risk standpoint, but also represent a source of potential return.

“Instead of letting a portfolio aimlessly drift until some happenstance trigger occurs, a clearly identified staff member could take ownership of the asset allocation decision and make adjustments in an explicit, rules-based, and informed manner.” The article argues that using such a rebalancing approach can boost fund returns by between 0.5% and 1.0%.

Such an “informed rebalancing” approach will experience ups and downs, the article states, but offers the potential for higher returns without the need for any change in investment policy or governance, and concludes,” an innovative public fund and other funds that have adopted this approach have reaped its long-term rewards.”