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Portfolio Reformation Schedule and Equity Factor Returns

October 20, 2020 • Posted in Strategic Allocation

Does equity factor portfolio reformation (rebalancing) schedule materially affect portfolio performance? In their February 2020 paper entitled “Rebalance Timing Luck: The (Dumb) Luck of Smart Beta”, Corey Hoffstein, Nathan Faber and Steven Braun measure rebalance timing luck (RTL) in returns for long-only portfolios of S&P 500 stocks selected based on:

  • Value – trailing 12-month earnings yield.
  • Quality – average of rankings for return on equity, accruals ratio (reverse ranking) and leverage ratio (reverse ranking).
  • Momentum – return from 12 months ago to one month ago.
  • Low Volatility – 12-month realized volatility.

They quantify RTL as dispersion in portfolio performance (best minus worst) across different reformation schedules. They also vary number of stocks (50 to 400) and portfolio reformation frequency (annual, semi-annual or quarterly) to assess RTL sensitivity to these parameters. For corroboration, they measure RTL for replications of existing S&P Dow Jones Enhanced Value, Quality, Momentum and Low Volatility indexes. Using data for S&P 500 stocks starting July 2000 and for factor-based indexes starting January 2001, all through September 2019, they find that:


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