nBalance – Fund of Funds Portfolio Management System


Overview

Benefit Trust Company’s “nBalance” is an automated, state-of-the-art, multi-currency Fund of Funds (FoF) portfolio cash flow management system, offered as a Benefit Trust-hosted service, which is designed to provide algorithmic cash flow allocation and rebalancing for asset allocation models that span an arbitrary number of hierarchal sub-asset class levels.  nBalance can deploy cash flows in the direction of sub-asset class and underlying fund target allocation percentages, allowing portfolios to remain as close as possible to an overall target allocation between rebalancing events. 

nBalance supports underlying securities, mutual funds, collective investment trusts (CITs), ETFs and other equities, other nBalance portfolios (recursively, with no limit, i.e. “Fund of Fund of Funds”), managed “held-away” accounts, and illiquid assets such as real estate, commodity, or private equity funds.  Target percentages in nBalance are based on “Effective Dates”, which means that nBalance supports the notion of time-varying target allocations, structure, and underlying securities, making nBalance ideal for creating glide paths for target date funds.  nBalance also supports active fund management through a mechanism that allows for “direct movements” of the underlying securities, where frequent/emergent changes may be required to capture tactical opportunities.

Why nBalance?

The main advantages of nBalance are embodied in the areas of Risk Reduction, Efficiency, and Transparency.  nBalance provides the following benefits to its customers:

  • Full automation of portfolio cash flow processing (no spreadsheet risk/human intervention)
  • It won’t interrupt your daily cash flows with rebalance or reallocation activities
  • No breakage between portfolio cash flow and net of underlying trades
  • Numerous controls to help ensure compliance with applicable securities laws
  • Extensive audit trail, logging, and reporting capabilities
  • Optional two-person control, for all model/portfolio management/changes
  • User restriction to specific functionality, portfolios, and menu items
  • Web-based interface for portfolio managers, advisors, and other interested parties
  • Support for active/passive portfolio cash flow management
  • nBalance delivers in a spectrum of paradigms, depending on customer needs:
    • Cash flow allocation only, i.e. “just the math”, underlying trading done by customer
    • Allocation and automated trading of the underlying, using BTC’s trading team
    • Portfolio unitization, using BTC’s valuation team

Cash flow allocation

nBalance supports both “static” and market-value-based cash flow allocation methods.  The cash flow processing component of nBalance is extensible, allowing nBalance to support additional custom cash flow allocation routines that may be requested by customers.  There is no breakage in nBalance: flows in at the portfolio level are equal to flows out for the underlying securities, to currency decimal precision.  Static cash flow routines are based on a fixed set of target allocations for each portfolio component.  Market-value-based routines include allocating cash in accordance with actual market value percentages (i.e. “momentum” investing), or allocation methods that combine target allocations with actual allocations.  Another example of market-value-based allocation is the ability to deploy daily cash in the direction of target percentages, for which we use the term “dynamic”.

Dynamic cash flow

The dynamic cash flow allocation algorithm in nBalance calculates relative differences between actual and target allocations. It does this for each of the underlying sub-asset classes/funds belonging to the portfolio. It then allocates the flow to the sub-asset class/fund having the least (i.e. most negative) relative difference first, in the case of a net purchase. Then allocates highest (i.e. most positive) relative difference first, in the case of a net redemption.  To be clear, if net cash flow is positive (negative), nBalance only buys (sells) the underlying.  This process is performed until the cash flow amount has been exhausted or until the relative difference of the sub-asset class/fund is equal to the next lowest (or highest) relative difference. 

In the latter case, nBalance allocates the remaining cash flow amount to sub-asset class/funds whose relative differences are equal, and the repeats the process until the remaining cash flow amount is zero.  In this way cash flow is used to move portfolio sub-asset class/fund market values in the direction of their target percentages, working its way from the top (portfolio as a whole) down to the individual underlying funds via the sub-asset classes at intervening levels.  This method is optimal in the sense that, constrained by the available positive (negative) net cash flow for the day and using only subscriptions (redemptions), nBalance maximizes (minimizes) the minimum (maximum) relative difference of sub-asset classes/funds at each level of the portfolio.

An important characteristic of dynamic cash flow allocation is that it typically results in far-fewer trades than other methods. This depends on cash flow amounts and how close the portfolio is to its targets.  Dynamic cash flow can, with sufficient daily flows, be a useful tool in keeping portfolios closer to their targets between rebalancing events.

Rebalancing

Users may schedule full portfolio rebalance events for any future date in nBalance (e.g. “schedule quarter-end rebalances for the next two years for the ABC Company 401(k) 2050 Target Date portfolio”).  nBalance also allows users to set time-based tolerances on target allocation percentages for sub-asset class/fund market values, which we call “partial rebalancing”, e.g. “if the Domestic Small Cap Equity sub-asset class differs from its target allocation by +5/-4% for a period of three consecutive days, rebalance the sub-asset class to which it belongs, i.e. Domestic Equities”.

nBalance user interface

nBalance provides an Internet-based web application interface for users and interested parties that allows them to administer/view portfolios.  This includes visual representations of the portfolios, depicting target allocation percentages, actual allocation percentages, and relative differences, as well as extensive, downloadable reporting.  Notifications for various events are handled via email so that users are informed of changes that may require them to take action.

nBalance provides algorithmic cash flow allocation and rebalancing for portfolios (e.g. CITs, custom portfolios) whose asset allocation models span an arbitrary number of hierarchal sub-asset class levels. We developed nBalance as a sophisticated portfolio management software for portfolio management unique to Benefit Trust. For more information, feel free to contact us to see how we can service your business.