A comment on “Portfolio rebalancing in South Africa”

Abstract

In this comment we add to the discussion on rebalancing portfolios by Sher and Barr (2011). In particular we highlight how a recent rebalancing proposal by Chan and Ramkumar (2011) is found to significantly improve rebalancing performance. An important feature of both studies is that they recognise the significant impact of rebalancing in stressed market conditions and consequently build this into their study designs. In this comment we adapt the tabled results of the first study and portray them in a graphical framework to be comparable with the results of the second study. A concerning feature of Sher and Barr's (2011) results is that the fixed-band strategies they propose still do not seem to adequately control the risks and costs of rebalancing arising in stressed market conditions. We consequently highlight how the Chan and Ramkumar's (2011) rebalancing proposal is especially beneficial in stressed market conditions and is likely to improve on the results of the rebalancing proposal of Sher and Barr (2011). Chan and Ramkumar's (2011) rebalancing proposal is based on a joint cost and tracking error minimisation optimisation. When we take heed of the fact that the South African environment is characterised by higher volatility than developed markets, and more so during stressed periods, this tracking error rebalancing proposal is likely to be practically appealing.

Keywords:

• Rebalancing Strategies
• Calendar Rebalancing
• Fixed-Band Rebalancing
• Tracking Error Rebalancing
• Stressed Markets
• South Africa

Acknowledgements

We acknowledge the support of BNP Paribas Cadiz Securities in the production of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.