White Paper

Volatility and Rebalancing as a Source of Return

Richard Yasenchak, CFA Senior Managing Director, Head of Client Portfolio Management
Valerie Azuelos Managing Director, Product Specialist

Key Ideas

Intech believes it can add value for its clients by capturing natural stock-price volatility to generate an excess return above the benchmark, over time. Implementing a scientific and disciplined risk-managed investment process, we do not forecast stock alphas; instead we attempt to construct a more-efficient portfolio by estimating the correlations and volatilities of stocks. Periodically rebalancing the portfolio back to optimal target weights, as stock prices move up and down, provides the potential to add return by beneficially capturing the natural volatility of stocks. It is this rebalancing, which can be applied to any equity benchmark our clients seek to outperform, that is necessary for preserving diversification and potentially achieving higher portfolio compound returns. The Intech investment process is derived from the following set of beliefs, which are based on more than 30 years of  research and application:

  • The capitalization-weighted index is not efficient and can be improved upon by varying portfolio weights based on the volatilities and correlations of stocks.
  • Positive excess returns can be achieved over the long term using only estimates of volatilities and correlations, through systematic rebalancing.
  • The opportunity for positive excess returns through rebalancing is demonstrated by Stochastic Portfolio Theory and further illustrated by the historical stability of the market’s capital distribution.

Building more-efficient portfolios

A capitalization-weighted index is not efficient, and can be improved upon by varying portfolio weights based on the variances and covariances of stocks.