Reviewing investment portfolios, assessing performance and rebalancing

Most ‘balanced’ portfolios allocate to all major asset classes for diversification.
Most ‘balanced’ portfolios allocate to all major asset classes for diversification.


  • Understanding the potential impact of extreme market conditions is an important barometer for making informed decisions about asset allocation and instrument-level choices.

It’s that time of the year to conduct a quick review of our investment portfolios, and ask ourselves a few questions. How can I stress-test my portfolio? We have been reading about stress tests for mid- and small-cap funds, which estimate the time and cost involved if a fund were to liquidate a substantial portion of its holdings. For your portfolio, however, a stress test should estimate the ‘drawdown’ or percentage fall in your portfolio if broader markets fall by about 10% or economic growth slows down significantly.

Ask your adviser to simulate how portfolios like yours have behaved when faced with the above two scenarios. As a general rule of thumb, at a portfolio level, most ‘balanced’ investors should be okay with a drawdown that is about two-thirds of what the broader market has fallen by. If broader markets fall by 10%, a portfolio fall of up to 6% should be acceptable to a balanced investor. More aggressive investors may be comfortable with a higher number.

Understanding the potential impact of extreme market conditions is an important barometer for making informed decisions about asset allocation and instrument-level choices. Is my current portfolio still in sync with my long-term needs (asset allocation)? Ideally, your portfolio should generate an optimal return that meets your future needs by assuming an acceptable amount of risk.

Most ‘balanced’ portfolios allocate to all major asset classes for diversification: Public equities, fixed income and credit, unlisted equities, real assets, gold and cash. More aggressive investors may load up on public and unlisted Equities, reduce allocation to real assets, credit and gold and perhaps even eliminate traditional fixed income and cash. Conservative investors will likely do the opposite. Now is a good time to evaluate how your portfolio’s asset- and sub-asset classes have moved over the last few years. Ensure your portfolio stays aligned with your long-term plan by addressing any drift from your desired asset allocation.

Working with your investment advisor to evaluate how to achieve this most efficiently is ideal. Avoid rushing or incurring high exit loads or taxes for significant portfolio changes. Spreading any changes over a few months or even quarters works best.

Is my portfolio optimally diversified? Portfolios should be neither under-diversified nor over-diversified. Under-diversification can make portfolio returns very lumpy and out-of-sync with broader markets. Over-diversification leads to ‘benchmark-hugging’ portfolios that typically underperform those benchmarks.

Diversification must also be considered at a sub-asset class and at an instrument level. Take an example of public equities - an investor must choose between sub-asset classes within public equities such as passively managed index funds, ETFs, actively managed mutual funds, PMSes, AIFs, direct stocks, structured notes and international equities for their equity allocation. Diversifying across a few sub-asset classes increases the chances of benefiting from broad market upsides while participating in upswings in specific factors (growth, value, momentum) or sectors.

To assess diversification, compare the number of funds or securities in your portfolio to a broad benchmark. For equity mutual funds, exceeding 12-14 funds or 4-5 in each sub-category may indicate over-diversification. For direct equity stocks, 30 is likely the maximum.

Are there any obvious gaps in my portfolio? Any adjustments needed? Given market conditions this fiscal, expect overall portfolio performance to be favourable, prompting a review of investment alignment with benchmarks and peers. For instance, reconsideration may be needed if a fund surpasses its benchmark by 100bps but lags behind peers by 300bps. Assess funds against peers by analysing their placement in quartiles based on 3-year and 5-year returns. Consistent placement in the 3rd quartile or lower may signal a need for realignment.

Check for gaps in your portfolio by ensuring sufficient representation of low-cost passive strategies that offer benchmark returns. These secular sectors have multi-decadal runway potential. Also, include alpha-seeking or absolute-return strategies for diversification. Assess your understanding of the portfolio’s total cost of ownership by estimating fees paid, including fund management (regular or direct code) and distribution/advisory fees. Optimizing returns involves limiting portfolio management costs efficiently.

After reviewing your portfolio through the lens of these questions, you can align it for optimal performance, increased resilience, smoother return profile, and a favourable cost structure while being adequately diversified and assuming an acceptable level of risk. Happy investing in the new financial year!

Himadri Chatterjee is head, Advisory & Key Clients Group at 360 ONE Wealth.

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