Rebalancing within VLS 80

traineepensioner

Could anyone help me with my understanding of the rebalancing within the VLS 80.

As I understand it the asset allocation (equities & bonds) is rebalanced periodically so that if the value of bonds rise higher than the equities then some bonds are sold & more equities are bought to maintain the 80:20 ratio (selling high, buying low).

Also, changes within the geographic regions are rebalanced to maintain the desired ratio. For example, if the value of the US equity index rose and the value of the FTSE all share fell, then some of the US equity fund would be sold & more of the FTSE all share fund would be bought. (selling high, buying low).

However, if certain individual shares within each index funds rose in perceived value then the fund would buy more and if any shares started to fall then the fund would sell them off, in order to track the capitalisation of the index (selling low, buying high).

Is this how it works?

Apologies if I've got this wrong and constructive comments welcome, thanks.

ColdIron

That's not how it works within an index. Take the FTSE 100. This isn't divided so that each company occupies 1% of the index and would need rebalancing to maintain that proportion. Instead each company has a weighting dependant on its market capitalisation, broadly the number of shares in public issue multiplied by its share price. So HSBC might be 6% of the index and, say, Easyjet much less than 1%. If the share price of HSBC was to rise then it might be 6.5% of the index. The tracker tracking the index wouldn't have to do any rebalancing (or buying high/selling low) as the weighting of each company would simply be a consequence of its market capitalisation as they shrink or grow

AnotherJoe

Para 1 yes para 3 no. The index takes care of itself until a share drops out if the index and a new one replaces it in which case those shares are sold/bought. But if Acme rises and Beta falls and they remain in the index then there's no need to do anything since by definition they make up the index. Eg if say Shell,was 1% of the index and its value rose to be 1.1%, then the previous holding of 1% would now be worth 1.1% so there's no need to do anything.
Para 2 yes for the U.K. artificial 25%, don't know for the rest of geographies since I don't know if they have fixed % for them or relative like shares. I think the latter though.

traineepensioner

Got it! ..... So to replicate the index (eg FTSE 100), when new money is added, the fund need only buy the same number of shares in each company making up the index, regardless of their cost.

Many thanks. :beer:

AnotherJoe

Not the same number of shares, the same relative % as represented in the index.
And not even to that extent since they only have to buy enough to make up an increase in the fund since new buyers to an extent can be catered for from sellers. Eg if in a given period customers sell £1M of funds, and new buyers buy £1.1M , they only need buy £100k worth of shares in the index.

Thrugelmir

Indexes also are weighted to account for the free float in a particular stock. Taking RBS as an example. The UK Government still owns some 62%. Therefore it's impossible for to purchase sufficient shares to weight a holding to the full market capitalisation.

System

Thrugelmir wrote: »

Indexes also are weighted to account for the free float in a particular stock. Taking RBS as an example. The UK Government still owns some 62%. Therefore it's impossible for to purchase sufficient shares to weight a holding to the full market capitalisation.

Some market indices are not weighted by market capitalisation, but are price-weighted:
Dow Jones Industrial Average: https://www.bloomberg.com/quote/INDU:IND
Nikkei 225: https://www.bloomberg.com/quote/NKY:IND

bowlhead99

Economic wrote: »

Some market indices are not weighted by market capitalisation, but are price-weighted:
Dow Jones Industrial Average: https://www.bloomberg.com/quote/INDU:IND
Nikkei 225: https://www.bloomberg.com/quote/NKY:IND

Very true, but as the OP is looking at the allocation among individual shares in the index funds held by VLS80, their money in US or Japan isn't allocated using the Dow or Nikkei rules, but instead through indexes which are free float market cap weighted.

Tom99

Thrugelmir wrote: »

Indexes also are weighted to account for the free float in a particular stock. Taking RBS as an example. The UK Government still owns some 62%. Therefore it's impossible for to purchase sufficient shares to weight a holding to the full market capitalisation.

Please can you explain what you mean?

bowlhead99

Tom99 wrote: »

Please can you explain what you mean?

Basically it means that the cap weighted indexes don't try to allocate your money into companies by their total value but by the total value which is available in free float.

So if you look at an S&P tracker, Walmart (worth $290bn) gets a lighter allocation than McDonalds (worth $150bn), on the basis that half of Walmart is owned by the Walton family who are pretty much never going to sell their shares, even though technically they could. Likewise China and various other emerging markets will get light allocations in a world tracker because some of the highest value businesses there have large state or founder ownership or certain share classes denominated in local currency are only really available to domestic investors (https://www.msci.com/msci-china-a-inclusion).

Tom99

bowlhead99 wrote: »

Basically it means that the cap weighted indexes don't try to allocate your money into companies by their total value but by the total value which is available in free float.

So if you look at an S&P tracker, Walmart (worth $290bn) gets a lighter allocation than McDonalds (worth $150bn), on the basis that half of Walmart is owned by the Walton family who are pretty much never going to sell their shares, even though technically they could. Likewise China and various other emerging markets will get light allocations in a world tracker because some of the highest value businesses there have large state or founder ownership or certain share classes denominated in local currency are only really available to domestic investors (https://www.msci.com/msci-china-a-inclusion).

Thank you. Just to be clear, RBS has a market cap of £30bn but only 38% of that is included in the FTSE100 Index?