To rebalance or not to rebalance, that is the agonizing question facing investment fiduciaries today. The sharp collapse of stock prices has left many underweight equities vis-a-vis bonds. Even if over the long term pension funds have outperformed their long-term strategic benchmark, its cold comfort when many pensions and endowments are down 20% or more just in the past few months. There are spending requirements and liabilities to pay, now and later.
Most large public investors tend to stick to their long-term plan, perhaps hugging the benchmark for job security. Recall John Maynard Keynes admonition that worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.
Thats why the famous 1986 Brinson, Hood and Beebower article in the Financial Analysts Journal says that more than 90% of return is explained by the strategic asset allocation. If you dont make any sector bets and stay close to the benchmark weights, of course the initial allocation will explain much of your performance over time.
I think that view is a bit too cynical. Passive rebalancing is a mechanical and disciplined approach that results in selling your winners and buying assets that have underperformed to get back to the strategic allocation. It takes the emotion out of investing and places the strategic allocation front and center as the right long-term (and short-term) asset mix. It is consistent with a belief in mean reversion of market returns and eschews market timing. If your circumstances and long-term market expectations havent changed, this makes a lot of sense.
There are practical limitations that can slow rebalancing, including disrupting asset managers and lockups that prevent ready access to cash. These days, illiquidity in the bond market may be a constraint on selling bonds to buy equities. In fact, corporate bonds are trading at Great Depression levels and might be a better value than stocks now. But that gets us into the realm of tactical asset allocation (OK, market timing).
A consultant recently said she would not rebalance now because the outlook was so unclear. In a previous life as a trader, she was taught to sit on her hands at times like this. But to me, sitting on your hands means returning to the allocation of the long-term strategic portfolio. Otherwise, you are making an active tactical bet. Behavioral finance tells us to be careful of this status quo bias.
The rebalancing decision depends on what discretion is given to the CIO and the role of the board of trustees. If automatic rebalancing is the mantra, then you need do it or call a special board meeting to change the strategic allocation. Otherwise, the CIO should be held accountable for tactical tilts by measuring actual performance vs. the long-term benchmark. I get the impression that there is some confusion about responsibilities here, yet it seems perfectly clear to me. Its probably in the investment policy statement.