Do Under-Managed Portfolios Outperform Over-Managed Portfolios?

Abstract

How often should a portfolio be rebalanced?  This is the question our study attempts to answer.  The Internet stock bubble and its aftermath made portfolio mangers very sensitive to their management styles.  Specifically, they had to reassess how often to evaluate a client’s portfolio.  This work examines the performance of portfolios that were aggressively managed and compares their risk-adjusted returns with those of portfolios that were managed infrequently.  To accomplish this, we change the rebalancing frequency of a well-diversified portfolio and track its performance over time.  This study will not only enable us to determine whether the performance of an actively-managed portfolio surpasses the performance of an under-managed or unmanaged portfolio, but it will also allow us to determine the optimal rebalancing period for maximizing risk-adjusted returns.  The asset selection and portfolio optimization methodologies applied to the portfolios in this study are identical to maintain consistency and comparability of results.  To evaluate the performance of each portfolio, we used daily observations from September 2000 to September 2006 and applied various rebalancing frequencies using the QuantAnalysis application at www.fundsformation.com.