DeAm’s research has indicated that this approach can add up to 2% excess return on average, before fees, over a traditional capitalization-weighted index at a similar risk level, the company said in a news release.
This growth rate potential stems from a constant rebalancing strategy, resulting in increased diversification over time. While this strategy isn’t new, analysts at DeAM believe that they have solved its inherent weaknesses.
Reducing Volatility by Rebalancing
Bearing in mind that a portfolio’s growth rate increases when the volatility of returns is reduced, and that rebalancing strategies reduce volatility, the firm created a methodology that groups assets to maximize the long term growth rate of a portfolio with risk levels similar to the benchmark.
Importantly, this technique assumes no estimation or forecasting of returns.
And while traditional index management is characterized by standard buy-and-hold strategies of capitalization-weighted indices, each investor holding the same portfolio regardless of preferences, the new strategy attempts to exploit certain inefficiencies in global investing while allowing the introduction of an investor’s unique investment preferences.
By maximizing the growth rate of assets rather than merely tracking a benchmark, the method seeks to provide superior portfolio returns at similar risk levels.