Quarter-end rebalancing: A myth?
With world stocks up more than 10 percent since the start of the year, it must be tempting for investors to cash in their gains before the quarter-end/fiscal year-end. Or is it really?
JP Morgan, which analysed equity buying of institutional investors including pension funds, insurance companies and investment funds in the United States, euro zone, Japan and the UK, finds that there is no empirical evidence of quarterly rebalancing by pension funds or insurance companies.
Below are the charts showing their findings on the amount of equity buying as a share of equity holdings in each quarter against the difference between equity return and the return on total assets. If pension funds and insurance companies do not rebalance at all, the amount of equity buying should be unaffected by the relative return of equities against total assets. And this is the result they found in Chart 1.
The regression line is horizontal suggesting no impact from returns to equity purchases.
In the case of investment funds however, they tended to rebalance when equities are doing badly.
Investment funds equity buying or selling exhibits little sensitivity to equity returns when equities do well, i.e. outperform other assets, as in the current quarter. But they are driven by momentum and sell equities when equities underperform.
JP Morgan says this momentum driven0selling of equities when equities underperform amounts to15% of the equity relative performance. That is, if equities underperform other assets by 10% in one quarter, investment funds will sell 15% x 10% =1.5% of their equity portfolio. Given an equity portfolio of $13trln for G4 investment funds, this 1.5% corresponds to around $190bln, the bank says.