reconstruction of a portfolio

Reconstruction is a process of portfolio optimization where in a security is sold or bought to keep up with the gains. Generally, the added security exhibit similar characteristics of the previous security posing a threat for returns.

If the value of a security is fully exhausted or the Asset Management team feels like the business has had the maximum up run, reducing the window to grow further, which results in huge opportunity cost of not utilising the cash to maximize returns. Reasons demand for portfolio restructuring:

  • Offloading or loading of a security which fail to fall under the criteria, portfolio construction and risk management goes knee to knee.
  • If a constituent stock is delisting, under Bankruptcy.
  • The manager finds more economically, fundamentally, technically sound security than the present security.

Rebalance and Reconstruction:

Reconstruction is completely exiting the security substituting it with a more suitable performer and in rebalancing the contribution or the portion of securities mismatch with the criteria of the fund where some portion of the security is overbought or underbought before rebalancing.

Portfolio construction vs asset allocation:

Portfolio construction starts with asset allocation, real assets or tradeable securities, etc., which supports the portfolio return. The collision and correlation between them are understood before putting them together. Apart from concentrating on how the combination of two or more asset classes performs, the correlation between the securities of the same asset class is put into process to mitigate risk and maximise return of the single asset in the portfolio.