Assume All Funds Are Equal Weight: Calculate Individual Fund Weight

An equal weight portfolio is an investment strategy where capital or assets are distributed equally among all investment funds or instruments within the portfolio, so that each element has the same proportion of the total portfolio value. For example, if you have a portfolio containing ten investment funds, each fund will receive 10% of the total capital.

This strategy means that each fund or asset within the portfolio has the same impact on the overall portfolio performance, regardless of its market size or value. This approach aims to reduce bias towards large companies or sectors, providing broader diversification for investors.

Equal weight portfolios are commonly used in index funds and some institutional investment strategies because they allow for easy monitoring and balanced risk distribution. Additionally, rebalancing is done periodically to ensure that the weight distribution remains equal over time, especially with changes in prices and market values of the portfolio components.

Compared to market-cap-weighted portfolios, equal weight portfolios may achieve different performance, especially in volatile markets or when there is a significant difference in the performance of individual assets. Therefore, it is important to understand the basic differences between these strategies before taking any investment steps.

To calculate the weight of a single fund in an equal weight portfolio, you must first know the number of funds or investment instruments within the portfolio. Then, the total weight (100%) is divided equally among the number of funds. The mathematical formula for this is very simple:

Weight of a single fund = 1 ÷ Number of funds

Or as a percentage:
Weight of a single fund = (1 ÷ Number of funds) × 100%

Practical example: If you have a portfolio containing 5 investment funds, the weight of each fund will be:
Weight of a single fund = 1 ÷ 5 = 0.2 or 20%

If the portfolio contains 10 funds, the weight of each fund will be:
Weight of a single fund = 1 ÷ 10 = 0.1 or 10%

Capital or investments are distributed according to this ratio to ensure fair risk distribution and avoid concentration in a specific fund. This method is one of the simplest and most transparent, making it popular among many investors, especially at the beginning of building investment portfolios.

The difference between equal weight portfolios and market-cap weighted portfolios is one of the fundamental topics in portfolio management. In an equal weight portfolio, as mentioned, capital is distributed equally among all investment instruments. In a market-cap weighted portfolio, a larger weight is allocated to assets with a larger market capitalization.

Example: If you have a portfolio containing three companies: Company A (market value of 70 million SAR), Company B (20 million SAR), Company C (10 million SAR). In the market-cap weighted portfolio, the weight of Company A will be 70%, Company B 20%, and Company C 10%. In the equal weight portfolio, the weight of each company will be 33.33%.

This comparison illustrates that the equal weight portfolio gives a greater opportunity for small and medium companies to impact the overall portfolio performance, contributing to reducing bias towards large companies. In contrast, the market-cap weighted portfolio may be more affected by the movements of large companies and is more representative of comprehensive market indices such as the TASI index in the Saudi market.

Each method has its advantages and disadvantages, and investors should choose the strategy that aligns with their goals and acceptable risk levels.

Diversification is one of the most important concepts in investment portfolio management and gains additional importance in equal weight portfolios. By distributing capital equally among all funds or assets, investors reduce the risks associated with concentrating investments in a single asset or sector.

Diversification in equal weight portfolios helps to mitigate the impact of fluctuations in the value of a specific asset on the overall portfolio performance. For example, if one of the funds incurs a loss, its impact will be limited due to its relatively small weight and will not significantly affect the portfolio as a whole.

For investors in the Saudi financial market, an equal weight portfolio can include stocks from various sectors such as basic materials (like Hail Cement, Symbol 3001), banks, telecommunications, energy, and others. This sectoral and geographical diversification contributes to achieving greater stability in returns and reducing risks associated with fluctuations in a specific sector or stock.

However, it should be noted that diversification does not eliminate all risks (such as general market risks), but it limits the unsystematic risks related to each individual asset.

To explain the concept of equal weights practically, we will take the stock of Hail Cement (Symbol 3001) as an example. Suppose you have an investment portfolio containing ten stocks from the Saudi market, one of which is Hail Cement stock.

In an equal weight portfolio:
- Total number of stocks in the portfolio = 10
- Weight of each stock (including Hail Cement stock 3001) = 1 ÷ 10 = 0.1 or 10%

Thus, if the portfolio capital is 100,000 SAR, 10,000 SAR will be invested in each stock, including Hail Cement stock. In this way, the performance of Hail Cement stock will only impact 10% of the overall portfolio performance, whether it generates a profit or a loss.

This application illustrates how an investor maintains a balance of influence among all portfolio components, reducing the likelihood of the portfolio being significantly affected by the performance of a single stock. More details about Hail Cement stock can be found on the Tadawul stock page or through the following link: [/stocks/3001/]

The equal weight strategy relies on distributing capital equally among all components of the portfolio, which offers several advantages:

1. Ease of implementation: Investments can be calculated and distributed easily without the need to monitor constantly changing market values.
2. Reducing bias: No larger weight is given to large stocks or funds, which reduces concentration and increases opportunities for small and medium companies to impact returns.
3. Enhancing diversification: Equal weight distribution reduces risks associated with the performance of a single asset.

However, the disadvantages include:
1. Need for rebalancing: As asset prices change, the distribution may become unequal, requiring periodic rebalancing (which may increase costs).
2. Ignoring performance differences: An investor may achieve lower results than market indices if small companies underperform compared to large ones during certain periods.
3. Not benefiting from significant growth: If a specific stock or fund rises significantly, its impact remains limited due to equal weight.

These advantages and disadvantages should be balanced when choosing the appropriate weight distribution strategy for the investment portfolio.

Despite the simplicity of the equal weight strategy, there are some practical challenges that investors may face:

1. Periodic rebalancing: As stock or fund prices change, the actual weight may deviate from the target weight for each element. This requires periodic rebalancing of the portfolio, which may lead to additional trading and management costs.
2. Liquidity: In some markets or small funds, investors may face difficulties in buying or selling the required quantities to maintain equal weights.
3. Taxes and fees: Frequent rebalancing may lead to higher trading fees or incur capital gains taxes in some markets.
4. Changes in the number of funds: If new instruments enter or old instruments exit the portfolio, weight distributions must be recalculated, which may periodically change the portfolio strategy.

Therefore, it is always advisable to evaluate these practical considerations when building an equal weight portfolio, especially when investing in emerging markets or low liquidity instruments.

The equal distribution of weights among portfolio components directly affects its performance. In some periods, equal weight portfolios may outperform market-cap weighted portfolios, especially if the performance of small and medium stocks is strong. Conversely, if large companies outperform, market-cap weighted portfolios may excel.

Studies indicate that equal weight portfolios often achieve higher long-term returns, but with relatively higher volatility. This is because small and medium stocks (with equal weights) are more susceptible to fluctuations, but they also offer greater growth opportunities.

On the other hand, the equal weight strategy helps reduce concentration risks, limiting the impact of a single stock or fund's poor performance on the overall portfolio. However, this approach requires continuous monitoring and periodic rebalancing to maintain the desired weight distribution.

The management of investment portfolios in the Saudi financial market is subject to strict regulations from the Capital Market Authority (CMA) to ensure investor protection and transaction transparency. When applying the equal weight strategy, fund managers and financial institutions must comply with the laws governing asset distribution and disclose portfolio structure.

It is important to emphasize that all investment decisions must consider the relevant regulations and instructions, and no equal weight strategy should be considered a substitute for careful study of the assets comprising the portfolio. Clear disclosure to investors about the weight distribution method and any potential changes is also essential.

Additionally, listed companies in the Saudi market, such as Hail Cement (Symbol 3001), are required to publish periodic financial reports and transparent announcements about their results and performance, which helps investors make informed decisions in accordance with the established regulations.

Rebalancing is the process of adjusting the asset distribution in the portfolio to return each asset to its original weight after market price changes. In equal weight portfolios, this process is essential to maintain equal weight distribution.

Rebalancing is typically done periodically (quarterly or annually), or when the weight of any asset exceeds a certain threshold (such as 5% above or below the target weight). This process may require selling part of the assets that have increased in value and buying more of the assets that have decreased in value.

Rebalancing helps control risks and maintain the original portfolio strategy. However, it may lead to higher trading costs, especially in large portfolios or when there are low liquidity assets. Investors should balance the need for rebalancing with trading costs and potential taxes.

The equal weight strategy is used in many index funds and exchange-traded funds (ETFs), where some funds aim to replicate the performance of an equal weight index rather than a market-cap weighted index.

An example of this is the S&P 500 Equal Weight Index in global markets, which gives each company in the index the same weight, regardless of its size. In the Saudi market, indices or funds can be designed in the same manner, so that each stock or sector receives an equal weight within the index.

This strategy provides investors with the opportunity to benefit from the performance of small and medium companies and achieves broader diversification compared to traditional indices. However, it may require active management and higher costs for rebalancing and maintaining equal distribution.

The equal weight strategy directly affects the level of risks and returns in the investment portfolio. Theoretically, equal weights reduce concentration risks, as no single asset or sector dominates the portfolio's performance. This contributes to a broader distribution of risks.

Conversely, equal weight portfolios may be more volatile than market-cap weighted portfolios, especially if they include stocks or funds with high volatility. In the long term, some studies indicate that equal weight portfolios may achieve higher returns, but they require active management and periodic rebalancing.

When applying this strategy in the Saudi financial market, investors should consider local market characteristics, such as trading volume, liquidity, and sector diversity, to ensure they achieve the desired benefits from equal weights.

Financial data plays a pivotal role in selecting the funds or assets that will enter the equal weight portfolio. Investors should review key financial indicators such as stock price, market capitalization, price-to-earnings (P/E) ratio, dividend yield, and revenue growth.

Example: When building a portfolio that includes Hail Cement stock (Symbol 3001), it is important to review the company's financial performance through its periodic reports to ensure its financial stability and growth potential. Important financial indicators for Hail Cement stock can be found in the table below.

Relying on financial data helps in selecting the most balanced and stable assets, enhancing the effectiveness of the equal weight strategy and reducing risks associated with selecting poorly performing assets.

To enhance practical understanding, we present several examples for calculating the weight of a single fund in equal weight portfolios:

1. Portfolio of 4 funds:
Weight of a single fund = 1 ÷ 4 = 0.25 or 25%

2. Portfolio of 20 funds:
Weight of a single fund = 1 ÷ 20 = 0.05 or 5%

3. Portfolio of 7 funds:
Weight of a single fund = 1 ÷ 7 ≈ 0.143 or 14.3%

In each case, capital is distributed equally among each fund or asset. When changes occur in the number of funds (addition or removal), the weight of the single fund must be recalculated, and assets must be redistributed to ensure weights remain equal.

These practical examples facilitate investors' understanding of how to apply the strategy in their personal or institutional portfolios.