A trio of analysts at Robeco Asset Management earlier this year warned in a study that the choice of rebalancing dates for Research Affiliates' fundamental indices can significantly change performance results.
"For the year 2009, for example, we find that a fundamental index rebalanced every March outperformed the capitalization-weighted index by over 10%, whereas a fundamental index rebalanced every September underperformed," notes the Robeco study, Fundamental Indexation: Rebalancing Assumptions and Performance.
Is rebalancing a free lunch? A violation of finance theory? No, because the cost of reaping the potential rewards is taking on more of certain types of short-term risks-giving up expected momentum profits, for instance. It's hard to rebalance out of an asset that's on a bull market roll. All the more so if you consider that the benefits of rebalancing are uncertain in real time and usually take years to obtain. No wonder that it's difficult for so many to exploit it. Of course, that's a key reason why rebalancing offers so much potential for the relative few who are emotionally suited to tapping its opportunities.