March 11, 2011
Note on Dynamic Weights
The aim of this note is to clarify how the dynamic weightswork in our Global Value Equity Portfolio.
The below tables are created from a fictive portfolio composing of five stocks (X1...X5) in period 1 with different startingvalues/weights.
After period 1 a new screening and ranking of global stocks meansthat X3 and X5 go out of the portfolio and are replaced with stocksX6 and X7. The combined weight of the two stocks exiting theportfolio is 25.1 percent.
These 25.1 percent are divided among X6 and X7 by their relativeweights based on the combined score used to rank and select ourportfolio after the monthly screening.
In this fictive case the relative weights for X6 and X7 are 58.7percent and 41.3 percent. Their weight start in period 2 is then 14.7percent (0.251x0.587) and 10.4 percent (0.251x41.3).
What if only one stock is leaving and has a high weight? This issue isimportant to address as it might raise concerns. Our view is this isinsignificant because the 15 stocks that are selected have thehighest quality relative to valuation.
Our extensive back-test also shows that our scaling method is solid.Our approach is also reducing transaction costs as a high weight onone stock going out is not distributed on 10 different stocks.
Source: own calculations
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