Our investment portfolios consist of high conviction stocks selected through thorough qualitative research. The allocation of assets (“our recommended weighting”) to each constituent stock is based on a repeatable systematic approach that puts emotions aside when investing. In time, the weighting of each constituent in the portfolio can change due to price movements or cash deposits/withdrawals.

To maintain an actively managed and balanced portfolio, we must rebalance to avoid excess drifts from our recommended weighting. However, the frequency of the rebalancing matters. Frequent rebalancing can surely lead to a high tax burden and sub-par after-tax performance. On the contrary, delaying rebalancing (less turn-over) can lead to worse performance (i.e. sacrifice alpha) for actively managed strategies. Active managers must balance the tax-benefit of lower-turnover to ensure alpha from active management is not sacrificed.

Xantos Labs typically rebalances the portfolios on a monthly basis or upon external events such as a recent forced liquidation due to a withdrawal by the client. We don’t believe in unnecessary churn.

After extensive research and backtesting various rebalancing strategies over a 20+ year history, we believe that a monthly rebalancing schedule is plenty to adjust for the natural changes that must occur throughout time to optimize the portfolio. We also set limits on drift so that we aren’t rebalancing the portfolio if there are tiny changes to the allocation that have no impact on your bottom line.

The best part about this process? It’s totally automated! You don’t need to worry about making adjustments to your portfolio. If you’re interested in hearing more about our thought process, take a look at the research we’ve done on the tax implications of frequent churn here.