MeritorQ Advisory – Change in Rebalancing Schedule from January 2024

At the outset, we had outlined the rules in MeritorQ will evolve based on our research and we will continue to enhance the rules if we find that the changes improve risk adjusted returns for investors. Consistent with this principle, we are announcing a switch to quarterly rebalancing schedule or rebalancing 4 times in a year from semi-annual rebalancing schedule as per existing methodology. 

The new rebalancing schedule has been put into effect in the first week of January 2024. Subsequently the portfolio will be rebalanced as of the first week of April, July, and October. All portfolio construction steps in MeritorQ will continued be applied at each quarterly rebalance.

Additionally, the construction rules will ensure that the allocation to a single stock at each rebalance shall not exceed 15%.

We see following benefits to investors for switching to quarterly rebalancing schedule:

• Reduces timing risk as undervalued stocks will be selected more regularly. For example, rebalancing quarterly would increase chances of picking up undervalued stocks if a sharp and sudden drawdown along with subsequent recovery occurs in less than 6 months. As we have said before, picking up profitable, undervalued through a market drawdown can benefit investors as such stocks recover faster when their mispricing corrects.
• Execution becomes easier as turnover will more spread out. This would mean lower impact costs from portfolio trades at the rebalance dates as the amount traded at each rebalance would be roughly half of what was required in semi-annual rebalancing. Also, because of this change, amount of funds required in investor’s demat account to successfully execute the rebalance in one-go will come down. 
• Single stock/portfolio concentration due to drift in allocations of individual stocks (due to price movements) can be addressed more frequently as the portfolio would be anchored back to model portfolio allocations once every quarter.
• Fundamentals as well corporate governance checks will be applied quarterly, so a stock failing any of the screening steps at the quarterly rebalance will be removed implying that such exits will be reflected sooner in the portfolio, than the current semi-annual rebalance scheme.

Our analysis based on back testing shows that while this change to a quarterly rebalancing schedule increases turnover slightly. We do not expect any meaningful change in number of stocks in the MeritorQ portfolio after this change.

We believe this change in rebalancing schedule along with the other changes we have made since launch, will improve risk adjusted returns for investors going forward while sticking to MeritorQ’s core investment objectives of buying clean, profitable and undervalued companies in a systematic, rules-based manner.

If you have any questions, please write to help.ia@marcellus.in

Team Marcellus

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