Portfolio management can mean slightly different things in separate contexts but generally refers to the process of mixing and balancing different investments within a portfolio based on the investor’s goals and preferences. This process incorporates asset allocation; investment research; creating definable objectives; assessing risk and returns, and employing resources towards targeted ends.
The “end of the quarter” refers to the conclusion of one of four specific three-month periods on the financial calendar. The four quarters end in March, or Q1; June, or Q2; September, or Q3; and December, or Q4. These are considered important times for investors. Many businesses, analysts, government agencies and the Federal Reserve all release critical new data about various markets or economic indicators at the end of a quarter.
There is a widely held belief that many hedge funds, pension funds, and insurance companies always rebalance their portfolios at the end of each quarter. While this belief is somewhat controversial and generally lacks widespread proof, it reinforces the concept that the end of a quarter is significant.
Even if major financial players do not always rebalance at the end of quarters, many investors use this time to re-evaluate their own portfolio management. This is done through a rebalancing by changing which assets comprise the portfolio or by setting new portfolio targets. Not only is it a good idea for investors to monitor their investments from time-to-time but rarely is so much new, actionable information released as during the end of a quarter.
Rebalancing involves the periodic sale and purchase of assets within a portfolio to maintain a target ratio. Consider an investor who wants a 50% growth stock, 25% income stock and 25% bond portfolio ratio. If during Q1, the growth stocks outperform the other investments substantially, the investor may decide to sell some growth stocks or purchase more income stocks and bonds to bring the portfolio back to a 50-25-25 split.
Traditional rebalancing involves trading the gains of well-performing assets, by selling high, for more low-performing assets, by buying low, at the end of each quarter. Theoretically, this serves to protect a portfolio from being too exposed or straying too far from its original strategy. However, pegging rebalances to the end of quarters relies on arbitrary calendar events which may not coincide with market movements. Nevertheless, the confluence of new reports that emerge at the end of quarters usually causes market reactions and should be of concern to most participants.
It is not just individual investors who consider making portfolio moves at the end of quarters. Portfolio management is also important for mutual funds and exchange-traded funds, or ETFs. There are two forms of fund portfolio management: active and passive. Passive funds generally peg their portfolios to market indexes and involve fewer changes in exchange for lower management fees. Active funds have a manager or team of managers who take a more proactive approach to beat market average returns. These funds can be quite active during the end of quarters, especially if their portfolios need to be adjusted to meet their previously stated goals and strategies.