Rebalancing poses problems

Advisers may face a difficult discussion with clients this year as they seek to rebalance portfolios.

Thursday, April 30th 2015, 6:00AM

by Susan Edmunds

Cameron Watson of Craigs Investment Partners

Cameron Watson, of Craigs Investment Partners, said rebalancing often seemed counter-intuitive to clients.

Advisers would be asking them to sell the investments that had performed best in their portfolios and buy more of the investments that performed the worst.

It's especially topical at the moment because equities have performed so strongly and interest rates on fixed income are so low.

New Zealand shares have returned 12.3% year-on-year over the past five years while government bonds returned 6.1%.

Watson said a portfolio established five years ago with an even split between New Zealand shares and government bonds would now have a weighting of about 57% to shares. “This means an investor that started out with a portfolio that was evenly split between New Zealand shares and bonds would now have a more risky portfolio.”

He said advisers could focus on selling any shares that had been problematic first.

“It’s a process of making sure you keep a portfolio in line with the benchmark and it’s essential that the risk of the portfolio stays where it was intended to be. But it can feel like you’re selling winners to buy laggards. Humans are not built for that. For many it might feel like the wrong thing to do.”

He said another hurdle for advisers this year was that, while rebalancing is essential to tackle risk, there has not been much risk in the market for a number of years now.

“Everyone naturally wants higher return and there is a cost to that and it’s risk. Just because we haven’t seen risk for a number of years now it doesn’t mean it’s not still there.”

Advisers could take an education role, he said, to keep clients informed and help them understand their underlying risk and return trade-off.

Tags: financial advisers investment