Interactive Investor

Model portfolios to automatically rebalance every quarter

15th September 2021 09:32

Kyle Caldwell from interactive investor

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From 1 October onwards, all five of interactive investor's model portfolios will automatically rebalance every three months. 

interactive investor’s five model portfolios will automatically rebalance to their target allocations every quarter from the start of October.

At present, if required, the model portfolios are manually rebalanced each quarter. In order to prevent over-trading and keep a lid on transaction costs, the constituents in the portfolios are only rebalanced if their weighting notably rises or falls.

Our tolerance thresholds (which will no longer be in place from the start of October) are set at above or below 10% of the relevant strategic weighting for each asset class. For example, if a portfolio had a strategic weighting of 25% to UK equities, the portfolio would only rebalance back to benchmark if the total allocation from all funds to UK equities exceeds 27.5% or falls below 22.5% at the quarterly rebalancing point.

But, from 1 October onwards, all five model portfolios will automatically rebalance. This is in order to avoid delays in notifying customers when rebalancing occurs. Our constituents have target allocations of either 5%, 10% or 15%. The weightings are displayed on our model portfolio page.

The Active Income, Active Growth and Ethical Growth portfolios are each comprised of 10 constituents, with actively managed investment funds and trusts favoured over “passive” index-tracking options.

The Low-cost Income and Low-cost Growth models are each comprised of nine index-tracking funds or exchange traded funds (ETFs).

In each portfolio, whether it is passive, active or ethical, the constituents are all picked from the ACE 40 and Super 60 fund lists, except where more specialist funds are required to fit the optimal asset allocation.

The benefits of rebalancing

Investors who follow our model portfolios could manually balance to our target weightings. Care, however, needs to be taken not to incur unnecessary transaction costs and potential tax implications (if investments are not held in ISAs or SIPPs). Therefore, followers of the portfolios may prefer to have their own tolerance rule and only rebalance when the weighting becomes out of kilter with the rest of the portfolio.

In practical terms, rebalancing your portfolio is just a tidying-up exercise. A diversified portfolio, like our five model portfolios, will have a mixture of different investments – typically shares, bonds and property – which behave differently from one another.

If the value of a certain investment goes up significantly more than the others, it increases your overall exposure to that asset, and in turn increases risk, which you might not be comfortable with.

By taking some or all the profits the percentage weighting is reduced back down to the risk level the overall portfolio was at when you first invested. The money can then be distributed evenly among other asset classes.

We will, of course, be continuing to cover the portfolios editorially each month (typically publishing mid-month), in which we report on the performance of the models and their constituents.

When changes to the constituents are made this will be reported in a timely fashion.

These articles are provided for information purposes only. The information we provide in respect of the ii Model Portfoliosii Super60 or ACE40 is an opinion provided by ii or one of its partners on whether to buy a specific investment or portfolio. Please note that none of the opinions we provide are a “personal recommendation”, which means that we have not assessed your investing knowledge and experience, your financial situation or your investment objectives. Therefore, you should ensure that any investment decisions you make are suitable for your personal circumstances. If you are unsure about the suitability of a particular investment or think that you need a personal recommendation, you should speak to a suitably qualified financial advisor.

The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Any changes to the ii Model Portfolio constituents and the rationale behind those decisions will be communicated through the Quarterly Investment Outlook.

ii adheres to a strict code of conduct. Members of ii staff may hold shares or units in investments which make up the ii Model Portfolios, which could create a conflict of interest. Any member of staff intending to complete some research about any financial instrument in which they have an interest are required to disclose such interest to ii. We will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, staff involved in the production of the ii Model Portfolios are subject to a personal account dealing restriction. This prevents them from placing a transaction in these portfolios or the underlying specified constituents of each portfolio for five working days before and after an investment is included or amended and made public within the list. This is to avoid personal interests conflicting with the interests of the recipients of the ii Model Portfolio options

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