Evolution of Country Rebalancing Triggers For the Emerging Markets
Parametric periodically performs longer-term research projects into key aspects of its emerging markets strategy, typically centered on the country weighting scheme, the rebalancing triggers, and the sector weighting algorithm. These are done to confirm that our portfolio construction techniques are still capturing the dynamics of the emerging markets in the most efficient way possible. The intent of these projects is not necessarily to change a process, and in many cases the outcome has been to re-confirm our confidence in the current methodology.
Over the course of 2015, our research and strategy teams performed a deep study into the rebalancing trigger process. As part of this, a wide array of triggering methods was investigated, using both historical back tests and simulations of model portfolios in a variety of market environments. Upon reviewing the results of this study, the Emerging Markets Investment Committee voted to adopt a new methodology, as they believe the revised process better matches the expected benefit of rebalancing with the trading costs incurred in doing these rebalancing trades.