U.S. pension funds that delayed rebalancing their portfolios are likely to pump about US$400-billion into stocks over the next two quarters, analysts at JPMorgan Chase & Co. said, providing a potential boost to equity markets battered by the coronavirus pandemic.
Weeks of asset price volatility may have pushed some fund managers to postpone rebalancing portfolios in which equity allocations have been knocked out of whack by a sharp decline in stocks, the bank said in a note to investors. The S&P 500 fell 20 per cent since the start of the year, marking its worst quarter since 2008.
“We still expect that US pension funds will eventually rebalance within 1-2 quarters,” strategist Nikolaos Panigirtzoglou wrote.
The bank said its estimate of US$400-billion in equity buying by the funds over the next two quarters could prove conservative. U.S. pension funds bought US$200-billion in stocks by the first quarter of 2009, in the aftermath of the global financial crisis – equivalent to US$600-billion today, the bank said.
Wild market swings have presented a challenge to asset managers looking to square their portfolios against a benchmark or return to their long-maintained allocation of stocks versus bonds. While the S&P is down about 24 per cent from its February highs, unprecedented support from the Federal Reserve and a US$2.2-trillion relief package from U.S. lawmakers helped stocks rally 15.5 per cent since March 23.
At least one fund – the Los Angeles City Employees’ Retirement System, which oversees some US$15-billion – is allowing its rebalancing to be deferred, according to a report in Pensions & Investments. The fund did not immediately respond turn a request for comment.
Brian Reynolds, chief market strategist with Reynolds Strategy, said in a note this week a rebalancing that leads pensions to sell bonds and buy stocks “makes no sense for pensions given the capital calls they are facing from credit and related products.”
Some index providers, such as S&P Dow Jones Indices, have delayed their quarterly rebalancing because of the market volatility, potentially complicating the picture for funds that look to track index performance.
Last week’s rally in stocks may have helped boost some funds’ equity allocations, making the need to increase exposure less acute, said Mike Schumacher, head of macro strategy at Wells Fargo Securities.
The bank last week had estimated that U.S. corporate pensions will need to shift about US$40-billion from fixed income into equities to maintain allocation targets. Its estimate now stands at US$20-billion after last week’s rally, Mr. Schumacher said.
At the same time, mutual funds, pensions and other asset managers rebalancing their portfolios may have stoked some of last week’s gains.
Steven DeSanctis, an equity strategist at Jefferies, said moves from fixed income into equities “most likely” happened last week, adding that “the rebalancings don’t have to take place on the 31st.”
Jack Janasiewicz, portfolio strategist at Natixis Investment Managers Solutions, said some of the market’s recent gains have come from quarter-end and month-end rebalancing.
“Once we get through the next couple of days, it’s going to be a little bit more interesting because the question then becomes, ‘Do we return really back to fundamentals and technicals?’”