The reason for this lies in the interaction of the portfolio weights. If, for example, the value of equities falls, this has a direct impact on the weighting of CHF bonds in the portfolio. As a result, the volatility of the weighting of CHF bonds in the portfolio is higher than would be expected from the asset class itself. An excessively narrow bandwidth for CHF bonds therefore makes the bandwidths of other asset classes such as Swiss equities almost irrelevant.
Broad-based rebalancing
This calls for a new, broader-based approach: The problem with bandwidth rebalancing was the starting point for us at Zürcher Kantonalbank Asset Management to develop the systematic rebalancing approach.
Thanks to this approach, it is possible to reliably recognise turning points on the financial market from a Swiss multi-asset perspective. What's more, this approach has shown that stable excess returns are possible over time. The approach is therefore suitable for systematic implementation with actively managed category investments, as we demonstrate using the example of our sustainable product range.
For a broader support of the rebalancing signal, we take a balanced Swiss investment strategy with a broad coverage of asset classes as a basis in a first step. This includes CHF bonds, government and corporate bonds, Swiss equities, global and emerging equities, as well as Swiss real estate, gold and commodities.
More balanced overall
In a second step, we then calculate the ranges based on the volatility of the portfolio weights within this investment strategy. Taking into account the volatility of the weights as opposed to the volatility of the asset class has the great advantage that the interaction effects are taken into account. This gives CHF bonds, for example, wider bandwidths than is often the case with traditional bandwidth rebalancing. As a result, each asset class has the same chance of indicating a turning point and the entire rebalancing mechanism is more diversified.
The result of these two steps is our Systematic Rebalancing Signal. As it turns out, this is significantly more balanced overall than other approaches; all asset classes together have triggered an average of three rebalancings per year since 2006, without one asset class dominating the number of rebalancings. We have been implementing the signal in our systematic portfolios since September 2021. In the recent past, the signal indicated two important turning points (red circles) on the capital markets on 24 October 2023, triggered by emerging market equities, and on 20 March 2024, triggered by global equities.