By opportunistically selling asset classes that have rallied and buying those that have lagged, a disciplined approach to rebalancing a broadly diversified portfolio of beta may be the best deal in money management. The reason, as Charlie Ellis famously counseled, is that the best way to win over time is by not losing.
With that in mind, what opportunities currently avail themselves for those inclined toward rebalancing? As our table below suggests, the pickings remain slim based on recent history. Investors looking for obvious candidates to sell based on year-to-date returns through April 6 will note the leader as MSCI EAFE, represented here by the iShares ETF tracking the index (EFA). Year to date, the ETF has climbed 6.2%. It's debatable whether that's enough of a run to warrant the associated trading costs and taxes that would come from paring the position and reallocating elsewhere.
But if EAFE's run in 2007 is a gray area, so too are the other asset classes, all of which have rallied by lesser amounts. In fact, the laggard so far this year is cash, represented here by Fidelity Ultra-Short. That's hardly surprising, although it suggests that the best opportunity for redeployment of capital still resides in the lowest-risk corner of the asset class pool.
Might there be more attractive quarry when profiling performance on a 12-month trailing basis? Yes and no. Yes, in the sense that the dispersion of returns is wider, which theoretically implies more rebalancing opportunities. As the 12-month column above shows, the distance between the top and bottom performer is significant. But here's where the analysis gets tricky. The laggard is commodities, albeit a measure of commodities that's energy heavy. Oppenheimer Commodity (which tracks Goldman Sachs Commodity Index) has shed 9% over the past year through Friday. Of course, much of the stumble came last year. More recently, the fund's been rebounding, as befits an oil-dependent portfolio.
For those who prefer their commodity indices more broadly defined, note that there's no red ink in either the trailing 12-month or year-to-date periods for a competing product. Witness the 9.1% gain in the past year in the Credit Suisse Commodity, which uses Dow Jones AIG Commodity Index as its bogey. The fund, in short, is the polar opposite of the Oppenheimer offering in terms of rebalancing opportunity.
While investors have reason to argue if it's time to buy or sell commodities overall, the scorecard is clearer when it comes to REITs. As an asset class, REITs have been nothing less than stellar performers. More of the same may be coming, or not. What's clear, however, is that over the past year, REITs have sharply outdistanced the other asset classes. As a result, quant-oriented rebalancers will recognize REITs as the leading contender for paring allocations.
But that leaves the challenge: Where to redeploy? Yes, it's easy to identify the winners, in either relative or absolute terms. Alas, there are no obvious losers, and so redeploying to cash remains the primary nominee on the receiving end. There are, however, limits to everything. For those with an already-heavy cash weighting, those limits are being tested. Indeed, long-term success can look foolish and unappealing in the short term, proving once again that there truly is no such thing as a free lunch.