Performance of six sigma rebalancing for portfolios mixing polar investment styles

Abstract

The paper investigates usefulness of a rebalancing strategy that was proposed in 2014 by Bod'a and Rohácová and is based on ideas borrowed from the managerial concept Six Sigma. Centring upon a small investor who is willing to invest into S&P 500 Index components in an attempt to track the S&P 500 Index, the paper compares the performance of different rebalancing strategies for four different sets of monthly data ranging from 2011 to 2017. Rebalancing is undertaken on a monthly basis and tracking portfolios are diversified by investing in proportions into stocks belonging to investment styles defined by size (big/small caps) and market-to-book ratio (growth/value stocks). The results show that the Six Sigma rebalancing strategy is superior in a transaction-cost-free environment, but when transaction costs are accounted for, it is dominated by the buy-and hold strategy and a liberal threshold rebalancing strategy. Overall, periodic rebalancing fares unsatisfactorily with respect to criteria adopted for performance assessment.