Setting personal financial goals is a lot like setting fitness/body goals for yourself. In that, it’s recommended that you take help from a fitness trainer, just like it’s recommended to take help from a financial expert for your financial goals.
With exercising, it’s well known that you cannot expect to do the same old exercises every day to yield results that align with your fitness goals. Your exercises and fitness regime have to be regularly reviewed and updated accordingly for you to be on track to achieve your goals. The story is quite similar to your financial aspirations.
For you to efficiently reach your desired financial outcomes, it’s important to periodically review and refresh your investment portfolio. That, in technical terms, we call Rebalancing.
What is Rebalancing?
Rebalancing is the process of reviewing the stocks/ETFs & their weights of a smallcase to ensure that it remains true to the theme or strategy. Rebalancing takes into account quarterly earnings, company news & updates, etc. and uses proprietary algorithms to objectively narrow down on the right set of stocks.
Why is Rebalancing important?
The market is dynamic, and so should be your investments.
In an ever-evolving market, rebalancing helps make sure that the constituents of the portfolio align with the underlying idea of the smallcase in the best possible manner. This is why we think our investors must understand the importance of rebalancing.
Our team works hard to ensure that we revisit the smallcases that you chose to invest in such that they stay true to the underlying idea on which it was initially built.
For example, if you have invested in the Pharma Tracker smallcase, it allows you to take exposure to the pharma sector of the country in the best possible manner. That entails having the most robust pharma stocks as part of the smallcase.
When we revisit this portfolio with the intent of rebalancing it, we want to make sure that only the best pharma stocks stay in your portfolio. So, companies that are a part of the smallcase and whose future performance has started to look bleak will be removed from the portfolio. Additionally, any company that fits the theme of the smallcase (Pharma, in this case) and has a shiny future outlook, will be added.
Rebalancing the Windmill way!
At Windmill, we try to stay ahead of the market by constantly monitoring developments around us and then tie it to the impact that it might have on smallcases that were created by us.
We start with the Quantitative approach
Before creating a smallcase or rebalancing it, we first use proprietary quantitative filters to filter out stocks that do not satisfy particular criteria. For example, from the universe of stocks available, we may choose to filter out stocks based on Earnings Per Share (EPS) growth. Companies with an EPS growth of less than 10% will not be considered. Other filters like promoter pledging, liquidity, valuation metrics, etc may also be applied.
Please note that the above was just an example and it might not be the case for actual smallcases.
These filters are taken into account to eliminate stocks. That leaves us with a certain smaller list of stocks which we then qualitatively identify/filter.
We move to the Qualitative approach
Once we have a smaller list of stocks, we begin to individually deep-dive into them to figure out their strength which cannot be otherwise noticed simply using quant metrics.
We go through company annual reports, management commentary, industry/sectoral developments that shape the company’s future, broker research reports, and other articles and data sets that help us get a good picture of the company in consideration.
And the final step
After careful analysis using the above approach, we chose to rebalance the smallcase by adding stocks that we think have strong future growth prospects and eliminate stocks that we feel might not do all so well.