A GIPS(R) (Global Investment Performance Standards) verification client was rebalancing their blended benchmark annually and their portfolio monthly. This sparked a whole long discussion with a few colleagues on the appropriate timing for rebalancing.

The basic question: must (or should) the portfolio and benchmark have identical balancing schedules?

The answer, I believe, has to be couched with a few key points:

• is the benchmark blended or a single market index?
• does the manager have control over the benchmark’s rebalancing?
• does the manager’s tactics require a balancing that is different than the benchmark’s?

The first two points are related, though it’s important that they be addressed separately.

If the benchmark is a blend of two or more market indices, then the manager clearly controls its timing. If the manager begins the year with the strategic balance established in the benchmark and portfolio, and the benchmark isn’t rebalanced again for a year, but the portfolio is rebalanced monthly, then I think there’s a problem. I would expect the timing to match.

If the benchmark is a market index, must the manager rebalance his/her portfolio to match that of the benchmark? I would say “no.” We have a client that establishes its portfolio’s allocations annually, and doesn’t do much to the portfolio for the remainder of the year. The benchmark rebalances much more frequently. The portfolio manager’s tactic is to let it ride. That is, not to make any adjustments once the allocations are established. I think this is perfectly fine. These details are disclosed as part of their marketing and GIPS materials.

There are no doubt other cases that could be considered, so there is probably not a “black-and-white” answer, though this may serve as at least the start of some guidance. Please let me know your thoughts by commenting below. Thanks!