Practical Applications of Rebalancing and the Value Effect

Abstract

Why do value portfolios experience higher growth in dividends than growth portfolios? In this Practical Applications report, Denis B. Chaves and Robert D. Arnott of Research Affiliates , propose an answer.

In an interview, Chaves and Arnott describe the findings of their research, which was detailed in Rebalancing and the Value Effect . Published in the Summer 2012 issue of The Journal of Portfolio Management , the article explains that the rules for rebalancing the two types of portfolios lead to an increased growth rate for dividend income in value strategies and a sharply reduced growth rate for dividend income in growth portfolios.

Chaves says their research findings underscore the necessity for managers and investors to take an active approach to rebalancing to ensure that the exercise yields the intended results and doesn’t alter the portfolio’s desired characteristics.