Systematic Re­balancing: Why the Approach has proven particularly effective during turbulent Times

Rebalancing involves returning a portfolio, which has deviated from its original positioning due to market fluctuations, to its initial investment strategy at a specific point in time. Portfolio rebalancing can be calendar-based, based on predefined thresholds, or, as in our systematic rebalancing approach, triggered by signals.

Typically, portfolio rebalancing follows a threshold-based approach. In this method, thresholds are set based on the volatility of the respective asset classes. However, the correlation with other asset classes also has a significant impact on the weighting within a portfolio. For instance, during a stock market crash, the weighting of CHF bonds generally increases far more than the volatility of the category would suggest. This often results in threshold breaches in low-risk categories, while the thresholds of more volatile asset classes, such as equities, are rarely reached.

Systematic Rebalancing Model – Our Robust Approach

In our view, this form of portfolio rebalancing does not meet the requirements of a robust and balanced portfolio management model. Therefore, our systematic rebalancing model is based on a balanced investment strategy with market-standard categories for a Swiss investor. These include CHF bonds, foreign currency bonds from governments and corporations, Swiss equities, global equities, emerging market equities, Swiss real estate, commodities, and gold.

Unlike the classical portfolio rebalancing approach, our systematic rebalancing model defines thresholds based on the volatilities of category weights and also considers the interaction effects between the various asset classes. As a result, CHF bonds, for example, have wider thresholds than their volatility might suggest, and each asset class has roughly the same probability of reaching its thresholds. This makes the systematic rebalancing model more robust.

Comparison with Traditional Portfolio Rebalancing Approaches

The basis for comparison is a Switzerland-focused multi-asset investment strategy with the following thresholds (illustrative example):

Source: Zürcher Kantonalbank, Data from January 2006 to June 2025

We then simulate the different portfolio rebalancing approaches from 2006 to the end of June 2025, taking into account realistic transaction costs in the form of subscription and redemption spreads for the respective asset classes.

Graphic 1: Historically robust excess returns even during the live period of systematic rebalancing

Each rebalancing rule has its own strengths. Calendar-based rebalancing generally shows the lowest tracking error relative to the strategy and can thus be ideal for strategy-aligned implementation. Threshold-based rebalancing achieves the lowest transaction costs during the reporting period and may be particularly suitable for cost-sensitive investors. The systematic rebalancing model, on the other hand, generally offers the most robust opportunities for outperformance. During the historical comparison period, it achieved the highest risk-adjusted relative performance, measured by the information ratio:

Source: Zürcher Kantonalbank, Data from January 2006 to June 2025. Legal notes regarding the table, see below

The tested example investment strategy likely corresponds to an average investment strategy for a Switzerland-focused portfolio managed according to sustainable criteria. It excludes asset classes such as gold and commodities, even though these are included in the signal. The excess returns achieved during the comparison period demonstrate that the additional asset classes included in the signal stabilise the model. The approach is therefore likely to work even with a less balanced investment strategy.

Recent Signals and the Development of Equity Markets

The following chart shows the most recent rebalancing signals and the performance of typical equity categories: global equities excluding Switzerland, Swiss equities, and emerging market equities in a mixed portfolio.

Graphic 2: The last six systematic rebalancing signals and the performance of equity categories in a mixed portfolio

The signal identifies market turning points

The six most recent signals were triggered by four different asset classes, highlighting the robustness of the approach. For example, on 7 April 2025, the approach identified an above-average equity correction. The systematic rebalancing model was able to take advantage of market movements and, in this case, the political nervousness associated with tariff announcements. The following table shows the respective asset class that triggered the signal and the implications for trades in the equity regions:

Interpretation of Live Signals: Often Early in Profit-Taking, Potential for Added Value in Volatile Phases

Rebalancing signals occur more frequently in volatile markets. In calmer market phases, such as in 2023 and 2024, only one or two rebalancing actions were required per year. Furthermore, due to the strong trend nature of the market, profit-taking often occurred too early. In 2025, however, three rebalancing actions have already been executed. In these volatile phases, there is potential to generate significant added value after deducting transaction costs. This is suggested by data from previous years, both during the financial crisis and the Covid-19 pandemic, as well as during live implementation in the current tariff dispute. In calmer phases, however, opportunities appear to be limited.

Graphic 3: Systematic Rebalancing with Added Value in Volatile Phases

Conclusion 

The systematic rebalancing approach aims to efficiently return portfolio weights to their target allocation, ideally taking into account the interaction effects of asset classes. This allows transaction costs to be minimised while benefiting from trends until it makes sense to rebalance the portfolio back to the original investment strategy. Emotionless implementation is a key success factor.