Investment Policy
Chapter Five
Investment Policy
ANSWERS TO QUESTIONS
1. Investment policy is a statement about the objectives, risk tolerance, and constraints
the portfolio faces. Investment management is the practice of attempting to achieve
the objectives consistent with the established constraints.
2. It should
a.
b.
c.
d.
Outline expectations and responsibilities
Identify objectives and constraints
Outline eligible asset classes and their permissible use
Provide a mechanism for evaluation
3. The client is responsible for
a. Setting explicit investment policies consistent with their objectives
b. Defining appropriate long range objectives
c. Ensuring the manager is following the investment policy statement
4. The manager is responsible for
a.
b.
c.
d.
e.
f.
Educating the client on infeasible objectives
Developing an appropriate asset allocation and investment strategy
Communicating the essential characteristics of the portfolio to the client
Monitoring the portfolio and revising it as necessary
Providing periodic progress reports to the client
Ensuring there is some method for learning when the client’s needs change
5. An individualist is deliberate in making decisions, but having made them does not
immediately second guess them or worry that they might have been wrong. A
celebrity makes decisions quickly, often consistent with the choices others are
making, but frequently worries about what they have done (or have failed to do).
6. Someone might be a social gadfly, into everything, concerned with fashion and fads,
and horrified of the possibility that they might be out of touch with “the current rage.”
With their investments, however, they might be thoroughly afraid of the stock market
and overly fearful of losing money. As a consequence they keep it all in the bank.
Investment Policy
7. Many guardians should invest in common stock. Frequently a person’s impression of
the risk involved with common stock is inaccurate or simply wrong. An appropriate
investment objective for a young guardian almost certainly requires some investment
in common stock. The guardian needs education about the matter first, however.
8. Unusual events can cause a stock price to move sharply. These movements are
unusual and should not be considered typical. Stock frequently rises or falls 2% in a
day, but seldom shows an annual movement of 500% (which such a daily movement
might imply).
9. An endowment fund must balance the needs of future generations with the needs of
current beneficiaries of the fund. Managing the fund toward growth favors future
generations; tilting the fund toward income favors people living today. The policy
makers for an endowment fund must balance the needs of these potentially competing
groups.
10. An endowment fund is a perpetual investment portfolio designed to carry out some
charitable purpose for both current citizens and future generations. Churches,
libraries, and universities often have endowments. A foundation is an organization
designed to benefit education, the arts, research, or some other general welfare
purpose. Its focus may be more on current beneficiaries than future generations,
although this is not always the case.
11. An accountant, investment advisor, or attorney could act as a fiduciary. You are not a
fiduciary by virtue of your profession, however. You assume fiduciary duties by a
specific relationship with a person or organization. A stockbroker, for instance, might
have investment discretion with one account but not with another. The first case
involves a fiduciary duty. The second account may not involve any such duty.
12. Many investors are more sensitive to losses than they are to gains. This leads some
people to value their portfolio much more often then they logically should. Shortterm fluctuations may not matter in the long run, but a loss averse investor may make
poor decisions based on short-term aberrations.
13. Surplus management focuses on the difference between assets available to service a
future liability stream and the present value of that liability stream. If the present
value of the assets exceeds the present value of the liabilities, there is a surplus. If
not, there is a deficit. The investment manager is more concerned with the
relationship between these two values than with either value by itself. Insurance
companies and defined benefit pension funds are surplus driven. A total return
manager, however, focuses on the increase in value of an investment fund by itself.
Mutual funds and individual investors think about total return.
Investment Policy
14. In some years the return will be negative. You cannot reasonably expect an
endowment’s administration to give money back in a down year. The prior year’s
distribution has certainly been spent.
15. In a defined benefit plan the company specifies a sum that the retiree will receive,
often based on a percentage of the person’s salary in their final few years of
employment. In a defined contribution plan the employer makes a contribution to the
employee’s retirement fund, but it is up to the employee how these funds are invested.
The company makes no warranty on the performance of the employee’s account.
16. With a defined contribution plan, the employer makes the contribution and that is the
end of the employer’s responsibility (other than record keeping). In a defined benefit
plan the calculations are much more involved. A change in salary likely means a
change in future benefits and a change in the funding scheme. In this case the
employer also can be adversely affected by poor market performance. This could
result in the company having to make additional contributions to the fund to make up
the difference.
17. Investment policy at a life insurance company is liability driven. The company is
most concerned with ensuring they have sufficient assets to pay off the insurance
policies as account holders die. Their principal objective is to earn a competitive
return on their surplus.
18. Life expectancies, and consequently insurance payouts, are relatively stable. Property
insurance claims, on the other hand, can occur all at once. This means that liquidity is
a primary concern at a property and casualty company.
ANSWERS TO PROBLEMS
1 – 3. Student responses.
4. CFA Guideline Answer (reprinted with permission from the CFA Study Guide,
Association for Investment Management and Research, Charlottesville, VA. All
Rights Reserved.
A. Key constraints are important in developing a satisfactory investment plan in
Green’s situation, as in all investment situations. In particular, those constraints
involving investment horizon, liquidity, taxes, and unique circumstances are
especially important to Green. His investment policy statement fails to provide an
adequate treatment of the following key constraints:
1. Horizon. At age 63 and enjoying good health, Green still has an
intermediate to long investment horizon ahead. When considered in the
light of his wish to pass his wealth onto his daughter and grandson, the
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horizon extends further. Despite his apparent personal orientation toward
short-term income considerations, planning should reflect a long-term
approach.
2. Liquidity. With spending exceeding income and cash resources down to
$10,000, Green is about to experience a liquidity crisis. His desire to
maintain the present spending level requires reorganizing his financial
situation. This may involve using some capital and reconfiguring his
investment assets.
3. Tax Considerations. Green’s apparent neglect of this factor is a main
cause of his cash squeeze and requires prompt attention as part of
reorganizing his finances. He should get professional advice and adopt a
specific tax strategy. In the United States, such a strategy should include
using municipal securities and possibly other forms of tax shelter.
4. Unique Circumstances. Green’s desire to leave a $1,000,000 estate to
benefit his daughter and grandson is a challenge whose effects are primary
to reorganizing his finances. Again, the need for professional advice is
obvious. The form of the legal arrangements, for example, may determine
the form the investments take. Green is unlikely to accept any investment
advice that does not address this expressed goal.
Other Constraints. Three other constraints are present. First, Green does
not mention the need to protect himself against inflation’s effects. Second,
he does not appear to realize the inherent contradictions involved in saying
he needs “a maximum return” with “an income element large enough” to
meet his considerable spending needs. He also wants “low risk,” a
minimum “possibility of large losses” and preservation of the $1,000,000
value of his investments. Third, his statements are unclear about whether
he intends to leave $1,000,000 or some larger sum that would be the
inflation-adjusted future equivalent of today’s $1,000,000 values.
B. Appropriate return and risk objectives for Green are as follows:
Return. In managing Green’s portfolio, return emphasis should reflect his need
for maximizing current income consistent with his desire to leave an estate at least
equal to the $1,000,000 current value of his invested assets. Given his inability to
reduce spending and his constraining tax situation, this may require a total return
approach. To meet his spending needs, Green may have to supplement an
insufficient yield in certain years with some of his investment gains. He should
also consider inflation protection and a specific tax strategy in determining asset
Investment Policy
allocation. These are important needs in this situation given the intermediate to
long investment horizon and his estate-disposition plans.
Risk. Green does not appear to have a high tolerance for risk, as shown by his
concern about capital preservation and the avoidance of large losses. Yet, he
should have a moderate degree of equity exposure to protect his estate against
inflation and to provide growth in income over time. A long time horizon and the
size of his assets reflect his ability to accept such risk. He clearly needs
counseling in this area because the current risk level is too high given his
preferences.
5. CFA Guideline Answer (reprinted with permission from the CFA Study Guide,
Association for Investment Management and Research, Charlottesville, VA. All
Rights Reserved.
The surplus in BI’s defined benefit pension plan declined despite the return achieved.
The surplus will fall when the present value of plan liabilities rises faster than the
market value of plan assets. Assuming no other changes, if the discount rate declines,
the present value of plan liabilities will rise by an amount about equal to the decline
times the duration of the liabilities. As Table 1 shows, long-term bonds of 10-year
duration (the same duration as the plan’s liabilities) had a 19.0 percent total return for
the year (composed of a 7.0 percent income return element and a 12.0 percent gain
element). Much of that return (the 12.0 percent gain element) was a direct result of a
decline in the general level of interest rates over the period, which implies that plan
liabilities with a similar 10-year duration would also have increased about 12 percent.
Because this rate of increase was greater than the total return (some 10.0 percent) on
the asset side, Constant Proportion Strategy the funded ratio declined and surplus was
reduces. (Note: wording error in the original text)
Alternatively, when the duration of the liabilities is 10 years, an interest rate change of
only 1 percent will cause a 10 percent change in liabilities (ignoring convexity and
assuming parallel interest rate changes). Any interest rate change greater than 100
basis points would cause a decline in the funded ratio if the return on the portfolio was
10 percent for the same period.
6. CFA Guideline Answer (reprinted with permission from the CFA Study Guide,
Association for Investment Management and Research, Charlottesville, VA. All
Rights Reserved.
A. Perhaps the single most important factor in any investment program is the holding
period of the assets (i.e., the period for measuring and judging results). The
investment time horizon is a primary determinant of the level of risk an investor
can tolerate. If time is shorter, high-risk assets should be avoided and vice versa.
Investment Policy
Risk tolerance is an essential component of the asset allocation decision, which is
the primary determinant of long-term investment returns.
Allocation strategies differ when considering limited versus lengthy horizons.
With insufficient time available, some asset classes may be too risky for inclusion
in a portfolio that would otherwise have legitimately held them in a long-term
context. Therefore, time constrains strategy.
The “time to maturity” of the corporate workforce is a key strategy element for
any defined benefit pension plan. The younger the work force, the longer the
horizon and the more time available for wealth compounding to occur. More
tolerance exists for short-run setbacks in exchange for long-run gains. In addition,
the funded status of the plan and the financial condition of the sponsor influences
its time horizon and risk-taking ability. BI is financially healthy and growing, and
its work force is young. Strategically, BI should adopt a long investment horizon
and consider a higher allocation to higher risk, higher return asset classes.
B. The following factors are important when constructing an effective pension
investment policy:
(i)
An appropriate risk tolerance.
Risk tolerance is a primary
determinant (central component or first step) of the asset allocation
decision. Asset allocation is the primary determinant of return. The
specification of risk tolerance for a plan embodies the ability and
willingness of the sponsor to absorb the consequences of adverse
investment outcomes and/or prolonged subpar fund performance, such
as its sensitivity to the possibility of being required to increase
contributions at unpredictable times and intervals. The less risk an
investor can tolerate, the less return will be achieved in the long run.
Therefore, careful consideration of risk tolerance is crucial to the longrun success of the pension plan’s investment program. An inappropriate
risk specification can lead the plan sponsor to a portfolio with more risk
than it can really tolerate, causing the sponsor to sell underperforming
assets at an inappropriate time, or a portfolio with less risk than it can
really tolerate, creating a lower expected return than otherwise
achievable.
(ii)
Appropriate asset mix guidelines. The asset mix strategy is the
primary determinant of the Fund’s returns. An inappropriate asset
allocation means an inefficient asset mix in terms of maximum return
for a given level of risk. Asset allocation policy guidelines establish a
framework for carrying out a strategy to achieve stated risk and return
goals. These guidelines provide the asset mix parameters, boundaries
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and constraints for the Fund’s operation. These guidelines control and
limit the actions of the Fund’s investment managers. The disciplines
established in the policy help prevent panicky response to short-term
market fluctuations.
(iii)
The benchmarks to be used for measuring progress toward plan
goals. Benchmarks provide the ability to measure whether the Fund’s
asset allocation policies are achieving or can achieve its goals and
objectives. By using benchmarks, managers can develop a framework
to observe and monitor the Fund’s progress and adjust the strategy if the
results are unexpected or goals are not met. An appropriate set of
benchmarks will enable an investment committee to measure the
contributions made by the various components of the plan’s policy or
strategy and determine necessary amendments if objectives are not
being met. Benchmarks also provide the capability to measure whether
individual managers are achieving their objectives and performing as
expected.
The choice of benchmarks expresses goals and objectives to the
manager and can greatly affect the strategy the manager employs. For
example, benchmarks provide diversification strategies for guiding
managers.
7. CFA Guideline Answer (reprinted with permission from the CFA Study Guide,
Association for Investment Management and Research, Charlottesville, VA. All
Rights Reserved.
A. Four shortcomings of the existing HFS Investment Policy Statement, and an
explanation of why these policy aspects should be reviewed, follow.
1.
The Statement’s “emphasis … on the production of income and the
minimization of market risk” is inappropriate. The return objective
should focus on total (expected) return rather than its components.
Furthermore, the return focus should be on enhancing either real total
return or nominal total return to include protection of purchasing power.
Either maximization of risk for a given level of return is a more
appropriate objective statement than the one included in the current
Statement.
2.
The existing Policy Statement does not specify important constraints
normally included such as time horizon, liquidity, tax considerations,
legal and regulatory considerations, and unique needs.
Investment Policy
3.
It is unclear whether or not the Investment Policy Statement of the early
1960s has been subjected to periodic review. The new Statement should
be reviewed at regular intervals (e.g., annually), and this review
requirement should be specified in the Policy Statement.
4.
It is unclear whether the four asset classes in which the foundation is not
invested represent the only classes considered. In any event, the asset
mix policy should permit inclusion of more asset classes, including
nontraditional assets.
5.
The limits within which HFS’s manager(s) may tactically allocate assets
should be specified in the Policy Statement.
6.
The limitation of holding “only domestic securities” because “all
expenses are in U.S. dollars” is inappropriate. At a minimum, non-U.S.
investment, with some form of foreign exchange risk hedge, should be
considered when the return-risk tradeoff for these securities exceeds that
on domestic securities.
B. A new Investment Policy Statement for HFS should include the following
statements:
Objectives:
 Return Requirement. In order to maintain its ability to provide inflationadjusted scholarships and its tax-exempt status, HFS requires a real rate of
return of 5 percent. The appropriate definition of inflation in this context
is the 5 percent rate at which full scholarship costs per student is expected
to increase.
 Risk Tolerance. Given its very long time horizon, HFS has the ability to
take moderate risk, with associated volatility in returns, in order to
maintain purchasing power, as long as undue volatility is not introduced
into the flow of resources to cover near-term scholarship payments.
As Swensen indicates in “Endowment Management,” a balance between preserving
purchasing power and providing a stable flow of funds to operating needs can be
achieved by determining a sensible long-term target rate of spending and applying this
rate to a moving average of endowment (fund) market values.
Constraints
 Liquidity Requirements. Given the size of HFS’s assets and the
predictable nature of its annual cash outflows, liquidity needs can be
Investment Policy
easily ascertained and provided for. A systematic plan for future needs
can be constructed and appropriate portfolio investment can be build to
meet these planned needs.
 Time Horizon. The foundation has a potentially infinite time horizon. A
three-to-five-year cycle of investment policy planning and review should
be put in place.
 Tax Considerations. Ongoing attention should be given to maintenance
of HFS’s tax-exempt status, including the 5 percent minimum spending
requirement. Its tax status should be examined and reviewed annually in
connection with its annual audit report.
 Legal and Regulatory Considerations. Foundation trustees and others
involved in investment decision making are expected to understand and
obey applicable state law and adhere to the Prudent Person Standard.
 Unique Needs and Considerations. There are none of significance not
already considered under objectives and other constraints.
C. In designing a revised asset allocation, long-term historical risk and correlation
measures for each of the five asset classes should be assumed. However, some
adjustments may be necessary, such as for the positive risk and correlation bias
of real estate resulting from the use of appraisal value in calculating real estate
returns.
Given the answers to parts A and B and the expected returns in Part C, increased
equity investment, including large- and small-capitalization domestic equities,
international (EAFE) equities, and real estate (for its inflation hedge and
diversification attributes) is warranted. Bank CDs should be eliminated; with no
pressing liquidity needs, cash equivalents can be minimized.
One appropriate allocation that includes both the current target (required) and
possible future range (not required) is:
Asset Class
Future Range
Current Target
Cash Equivalents
Medium- and long-term (U.S.)
Government bonds
Real Estate
0% - 5%
2%
20% - 35%
30%
0%- 10%
8%
Investment Policy
Large- and small-capitalization U.S.
equities
30% - 50%
40%
International (EAFE) equities
5% - 20%
20%
Equity securities comprise 60 percent of the total in this allocation, an
appropriate mix given the relatively moderate spread between fixed-income and
equity expected returns.
8. CFA Guideline Answer (reprinted with permission from the CFA Study Guide,
Association for Investment Management and Research, Charlottesville, VA. All
Rights Reserved.
A. Controlling Surplus Variance
A bond portfolio that either cash-matches or maintains a duration equal to the
duration of the liabilities would minimize surplus volatility. Therefore, a
dedicated or immunized bond portfolio is the low-risk approach. Plan assets
would be managed to optimize returns while minimizing surplus volatility. So, to
the extent that the company has a risk tolerance that would permit some surplus
volatility, some higher-returns assets could be substituted for some bonds.
Three additional asset allocation strategies are available to manage surplus
variance:
 Increasing liquid assets to support an unexpected shift in contributions or
payments arising from a change in actuarial experience,
 Excluding of risky asset classes, and
 Increasing the portfolio weights in long-term bond investments.
The final strategy will reduce portfolio return as long-term bonds have relatively
low expected rates of return.
Other implications: Incorporating the pension plan’s liabilities in the riskmanagement process implies the fiduciaries want the ability to monitor and control
the degree of financial risk they are willing to tolerate in the financial condition of
the plan (plan surplus) and in the security of the promised benefits. Incorporating
liability analysis in the asset allocation decision implies the fiduciaries want the
ability to address the plan’s short- and long-term risk tolerance for potential
deterioration in funding status and consequential impact on the need for additional
funding. Managing surplus risk implies the pension fund should be viewed as an
independent, stand-alone financial institution.
B. Managing Corporate Risk Exposures
Investment Policy
One reason a pension fund might adopt an investment policy that seeks to manage
corporate risk exposures (incorporating the operational, economic, or financial risk
characteristics and exposures of the corporation into the pension fund investment
policy equation) is the belief that the pension plan’s asset allocation policy should
recognize the financial interdependence of the company’s financial affairs and the
pension fund. This approach to pension fund investment management allows
corporate managers to control pension fund risk at the corporate level instead of
considering risk at the pension fund level in isolation.
A second reason for controlling corporate risk exposures is the attempt to increase
the probability that if the firm is called upon to increase its support for the plan, it
will be in a position to do so. The strategy would focus on managing plan assets
to maintain funded status relative to underlying corporate strength. Plan assets
would be managed to optimize returns while reducing the probability that
significant adverse developments would accompany a requirement to significantly
increase corporate contributions to the plan.
A third reason is that the pension fund should be viewed as a wholly owned
subsidiary of the plan sponsor.
C. Illustration of Managing Corporate Risk Exposure
An asset allocation strategy incorporating risk exposures of the corporation would
avoid assets that are expected to underperform when the company is
underperforming. For example, if the experience of the 1970s is a guide, a sudden
surge in inflation will cause liabilities to rise more rapidly than assets for most
plans because of inflation’s positive effect on wages and negative effect on most
asset values and returns. The main business/pension plan integration question is:
How does this sudden surge in inflation affect the pension plan? If the main
business revenues are closely tied to inelastic product price inflation (as is the case
for oil companies), the rising required contribution rate might not be a major
concern. On the other hand, if the main business costs are more likely than
revenues to be affected by elastic price inflation (as is the case for consumer
products companies), a requirement to put more money into the pension plan
could aggravate an already serious cash flow situation. Therefore, the plan
sponsor in this situation should emphasize acquiring inflation-hedged pension
assets. Stock portfolios can be constructed that are expected to outperform when
the rate of inflation is above its expected value and underperform when it is below.
Another asset allocation strategy incorporating risk exposures of the corporation is
feasible if foreign markets and economies have a low correlation with the
domestic economy or the financial health of the corporate plan sponsor. In such a
case, foreign stocks in the pension fund perform independently of the sponsor and
pension fund investments in foreign markets could reduce the probability that
Investment Policy
adversity in the firm’s financial position will coincide with deterioration in the
plan’s funded status and require increases in contributions. A good example of
this strategy would be a domestic auto company investing plan assets in foreign
auto stocks.
9. CFA Guideline Answer (reprinted with permission from the CFA Study Guide,
Association for Investment Management and Research, Charlottesville, VA. All
Rights Reserved.
A. Conceptual Shortcomings of Median Manager Benchmarks
With the exception of being measurable, the median manager benchmark fails to
satisfy the conceptual or fundamental properties of a valid benchmark.
Specifically, the median manager benchmark is
 Ambiguous,
 Not investable,
 Inappropriate
 Not reflective of current investment opinions, and
 Not specified in advance
The median manager benchmark is ambiguous because the weights of individual
securities in the benchmark are not known. The portfolio’s composition is
unavailable for inspection either before or after the evaluation period.
The median manager benchmark is not investable. That is, a manager using a
median manager benchmark cannot forgo active management and, taking a
passive/indexed approach, simply hold the benchmark, because weights of
individual securities in the benchmark are not known.
The median manager benchmark may be inappropriate because the median
manager universe encompasses many investment styles and, therefore, may not be
consistent with a given manager’s style.
The median manager benchmark will include many securities for which the
manager has not formed a current investment opinion and is not reflective of
current investment opinions.
Most importantly, a median manager benchmark is not specified in advance;
hence, it cannot be constructed before the start of an evaluation period. The
median manager can only be identified ex post.
B. Statistical Problems of Median Manager Benchmarks
Median manager benchmarks are subject to a significant survivor bias, which
results in several drawbacks, including the following:
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 The performance of median manager benchmarks is biased upward;
 The upward bias increases significantly with time;
 Survivor bias introduces uncertainty with respect to manager ranking in the
universe;
 Survivor bias changes the shape of the distribution curve by skewing it.
When clients find managers that consistently perform poorly, they drop the
managers. When these managers go out of business, they drop out of the universe;
even if they reenter the universe, their performance record is interrupted. These
deletions bias the performance of a median manager benchmark upward.
Moreover, the upward bias increases with time. This result was corroborated by
research reported by Bailey in the first reading referenced for this question (S.
Bleiberg, “The Nature of the Universe,” Financial Analysts Journal [March/April
1986]). Bleiberg conducted research on the magnitude of survivor bias over
various horizons. He determined that the magnitude of the survivor bias over five
years is about 150 basis points (bps) a year. Over 10 years, the bias increases to
240 bps. Over long time periods, 100-200 bps can easily move a manager across
universe quartiles. Therefore, much uncertainty exists with respect to relative
manager rankings within a universe in different time periods, which makes
performance evaluation difficult. Survivor bias also changes the shape of the
manager performance distribution curve.
C. Advantages of DGP-Weighted Index as Benchmark
Several reasons might cause an investor to prefer to use a GDP-weighted index
rather than a market-capitalization-weighted index as a benchmark. One reason is
that a market-cap-weighted index may overweight or underweight certain markets.
Another is that market-cap-weighted indexes may exhibit greater instability than a
GDP-weighted index.
The circumstances that may cause a market-cap-weighted index to systematically
over-or underweight a market or exhibit instability are
 Excessively high or low relative market valuations in certain markets—for
example, the “maoichi effect” in Japan, where cross-holdings of shares
artificially inflate reported market capitalizations,
 Thin public stock markets, and
 Significant market moves.
Japanese stocks provide an example of the problem of the first point, valuation
differences. When publicly listed Japanese companies trade at P/E multiples that
are much higher than the rest of the world, Japan’s relative stock market
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capitalization is far greater than its relative economic production. The result is a
systematic overweighting of Japan in a cap-weighted global index.
Cross-holdings inflate reported market capitalizations because some stocks are
counted twice. Several studies have estimated the magnitude of cross-holdings for
the Japanese market to be on the order of 40 percent. That is, Japan’s market
capitalization is about 40 percent higher than its underlying economic value.
Again, the result is a systematic overweighting of Japan in a cap-weighted global
index.
Furthermore, some countries have relatively large economies but relatively thin
public stock markets. For example, because most equities are privately held in
Germany, its various exchanges add up to a relatively small public stock market.
Thus, the relative stock market capitalization of Germany is much smaller than its
relative economic production. A mismatch may also exist between GDP and
market capitalization in emerging countries with undeveloped securities markets.
The result is a systematic underweighting in market cap-weighted global indexes.
Finally, market capitalization weights result in greater instability than GDP
weights because of market movements, the third point. For instance, Japan’s
weight in the market-cap-weighted EAFE (Europe/Australia/Far East) Index was
less than 15 percent at the start of 1970, when the EAFE Index was first launched.
Its weight had grown to almost 70 percent by 1989 and was just under 40 percent
in mid-1997. These changes in weightings because of market movements create
instability and require frequent rebalancing in a portfolio benchmarked to a capweighted index, which can prove to be quite expensive in the long run.