The “Annual Reset” Concept in Portfolio Management

Craving Alpha
4 min readNov 13, 2020


While we are not sure if the “Annual Reset Concept” is something unique, We hope this goes a long way in changing how “Portfolio Management/ Fund Management” has been performed in the past to benefit the investor/client more than the manager or the fund.
But first, let's highlight what “Portfolio Management” means and what flaws need fixing.

Portfolio Management

Has been a fairly new concept, in theory, however, we believe it has been in existence since the inception of equity rather since the inception of investing. While probably back in the day it must’ve been more about asset allocation, today we have professional firms offering “Portfolio Management Services” (PMS) focussing on selective industries, assets and even as capital allocation within businesses.

But, What does it mean today?

As a definition, “Portfolio Management, is the practice of designing an optimal capital allocation schedule within a focussed group of assets in order to grow the collective value of an investment in a favourable risk/return trade-off”. While, technically implies that each portfolio is designed individually to account for the Risk/Return Tradeoff for each portfolio instead, for the sake of convenience professionally managed firms have started offering thematic or model-based portfolios for the investors to choose from. Probably replacing the idea of “Asset Selection” and “Security Selection” with “Theme Selection” or “Manager Selection”.

The Flaw in the Design

Since the inception of PMS and Fund Management, rather the “newer design” has a few flaws, namely:

  1. Inter Client Returns Deviation: Most funds suffer from this flaw. While investing in portfolios should not have a major problem of “mistiming the markets”, it has been observed that newer clients have lower returns than the older clients.
    Probably because most funds that are marketed have shown considerable outperformance in the past “which however might not sustain” hence the older investors have made more returns.

As a Fun Excercise ask your manager to disclose the annualised standard deviation across clients portfolios.

  1. The 80/20 Principle: “The 80–20 rule, also known as the Pareto Principle, is an aphorism which asserts that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event. In business, a goal of the 80–20 rule is to identify inputs that are potentially the most productive and make them the priority.”
    Today, most funds present their performance across a favourable past wherein most of their returns (probably 80%) are derived by 20% of their “Stock Selection” however this may or may not sustain or translate into similar returns for any new investor.
  2. The Presentation: Most presentations are a function of “the probability of something in the past working out in the future”.
    Would you want to invest in chance? By design, as the corpus of investment goes up most investment strategies become less effective- saturating as the investor base increases.
  3. Liquidity: A major problem with portfolios investing in stocks. Probably a strategy investing in smaller companies for higher returns would either fail to work with higher capital or eventually would fail to liquidate those stock in profits. While most large-cap investing strategies would have no problem of liquidity, statistically very few “large-cap” strategies “post costs and commission” would fail to consistently beat the index.
  4. Emotional Bias: Like any investor/investment even fund managers risk being emotionally attached to investments which may cloud their judgement.

However, even with most such flaws, the investment management industry will only grow from strength to strength because the probable growth in equities has been rewarding enough in the past and we believe it would continue to be so in the future.

The “Annual Reset” Concept

Given the above flaws, no single portfolio is a perpetual long-term investment. Like in equity investing even portfolios/funds would need to be churned, managers and themes alike. Our research team in the quest of being able to create a worry-free portfolio realised what we needed to achieve was:

  1. A Quant based algorithm which wouldn't care about what stocks to buy, removing all probable emotional connections between the manager and the investment.
  2. A Factor-Based Hybrid model that would liquidate each year (annually reset) itself to buy into a fresh new portfolio, so that each investor has similar returns over a longer time horizon.
  3. With super low churn and a reset post “Long term Capital Gains” eligibility, we were able to drastically reduce cost and increase the reinvestment growth.
  4. Reducing the stock universe to the top 100 stocks by market capitalisation on the date of “RESET” we were able to reduce issues with liquidity.

Does it work?

While we are very proud to put on record it does work, we are not sure the reader of this post would be interested in the returns we could generate.

We backtested the algorithm, on an :
1.“as-is” basis- using current data as “it must have been” in the past
2.“as-it-were” basis- using data as “was available” in the past.
Reducing major data science issues like data mining and survivorship biases.

The results across 15-years of backtesting on “as-is” basis resulted in a “pre-cost” and “pre-dividend” annualised growth of 26.11% per year.

While the results across 10-years of backtesting on “as-it-were” basis resulted in a “pre-cost” and “pre-dividend” annualised growth of 19.84% per year.

Though past performance does not guarantee or imply any trend for future performance.

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Craving Alpha

Leveraging Research and Data Science to create actionable investing strategies in the stock markets. All posts are educational | more on