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Models and Allocations: Rebalance Selected Securities

Modifying securities including the “sweep” investment

When you modify securities including the “sweep” investment, our system will generate orders to bring each security in the Model Folio and all subscribed Folios (if the Model Folio is published) as close as possible—but often not exactly equal—to the model’s target weights. Beware that in many cases, using “Rebalance Selected Securities” may lead to unexpected consequences. To monitor deviation of the subscribed Folios from the model, Model Managers should regularly review the Folio Holdings report. This report can be accessed by clicking on the Statements & Tax Records in the Model screen.

Additional Detail Regarding Rebalancing Selected Securities

Our system will use the amount invested in the “sweep” investment as necessary to achieve the model’s target weights. However, depending on how much is invested in the “sweep” investment, the system may not be able to bring each security exactly to its model target weight.

Example

Security Target Weight Current Market Weight Difference Orders will bring
market weight to:
IBM 15% 18% 3% 15%
“sweep” 20% 18% -2% 21%
MRK 23% 25% 2%  
C 17% 19% 2%  
CSCO 25% 20% -5%  

In the above example, Let’s say you choose to rebalance IBM and the “sweep” investment. Our system will generate orders to bring the current weights for IBM and the “sweep” investment to 15% and 21% (proposed market weights), which are close to but not exactly equal to their model target weights (column 2).

Another Example

Security Target Weight Current Market Weight Difference Orders will bring
market weight to:
IBM 15% 10% 3%  
“sweep” 20% 18% -2% 13%
MRK 23% 25% 2%  
C 17% 19% 2%  
CSCO 25% 20% -5% 25%

In the above example, you choose to rebalance CSCO and the “sweep” investment. Our system will generate orders to bring CSCO to its model target weight. You can see that the sweep investment is farther away from its target weight.

Reminder!

There may be times, when the amount invested in the “sweep” is not sufficient to allow the system to bring the market weights of other rebalanced securities exactly to model target weights.

Example

Security Target Weight Current Market Weight Difference Orders will bring
market weight to:
IBM 15% 10% 3% 11.875%
“sweep” 20% 5% -2% 0%
MRK 25% 20% 2% 23.125%
C 17% 20% 2%  
CSCO 23% 45% -5%  

In this case, you choose to rebalance IBM, MRK and the “sweep” investment. There is not enough invested in the “sweep” investment to bring IBM and MRK exactly to their model target weights. I this case, our system will generate orders to that will get them as close as possible. Effectively, the amount in the “sweep” is prorated and distributed to IBM and MRK.

Modifying securities NOT including the “sweep” investment

  • Published Model Folios. Our system will generate orders to bring each security in the Model Folio and all subscribed Folios as close as possible—but often not exactly equal—to the model’s target weights.
  • Unpublished Model Folios. Our system will generate orders to bring each security in the Model Folio as close as possible—but often not exactly equal—to the model’s target weights. Unpublished models do not have subscribers.

Reminder

After sync orders are generated for subscribed Folios, the orders are executed according to the instructions of individual advisors.

Example

Consider a Model Folio of five securities. Let’s say you select IBM and Microsoft to rebalance.

Security Target Weight Current Market Weight Difference Orders will bring
market weight to:
IBM 15% 18% 3% 15.43%
MSFT 20% 18% -2% 20.57%
MRK 23% 25% 2%  
C 17% 19% 2%  
CSCO 25% 20% -5%  

Our system will generate orders to bring the current weights for IBM and Microsoft to 15.43% and 20.57% (proposed market weights), which are close to but not exactly equal to their target weights.

Tip!

If the sum of differences for securities you want to trade add up to zero, our system will generate orders to bring the securities in line with the current weights exactly.

Example

You want to trade only Microsoft and Merck. You can see that the sum of differences between each security’s Target Weight and Current Market Weight add up to zero. In this case, our system will generate orders to bring Microsoft to 20% and Merck to 23%; their proposed market weights equal their newly saved target weights!

The Formula

Here is the formula to figure out how close to the Target Weight the proposed market weight will be for each security you select to trade:

PMW1 = (TW1/STW) * SCMW

PMW2 = (TW2/STW) * SCMW

PMWx = (TWx/STW) * SCMW

PMW = Proposed Market Weight for a Specific Security
TW = Target Weight for Specific Security
STW = Sum of Target Weights for all Securities You Select to Trade
SCMW = Sum of Current Market Weights for Securities You Select to Trade

Example

Let’s say you are rebalancing only IBM, Microsoft, and Cisco Systems.

Applying the formula:

IBM PMW = (15/60) * 56 = 14%
Microsoft PMW = (20/60) * 56 = 18.67%
Cisco PMW = (25/60) * 56 = 23.34%

As you can see, the proposed market weight differs from the Target Weight you set.

Security Target Weight Current Market Weight Difference Proposed Market Weight
IBM 15% 18% 3% 14%
MSFT 20% 18% -2% 18.67%
MRK 23% 25% 2%  
C 17% 19% 2%  
CSCO 25% 20% -5% 23.34%