WALL STREET week: Rebalancing fund portfolios may support stock recovery

US, WASHINGTON (ORDO NEWS) — Fund managers can support the nascent stock rally following the collapse of markets due to the coronavirus by rebalancing their portfolios and increasing the proportion of stocks at the end of the quarter.

The S&P 500 index lost about a third of its value during a recent sell-off, so investors may have to step up stock purchases and bond sales to maintain asset allocation targets.

The portfolio, in which in mid-February the share of shares was 60% and the share of bonds was 40%, can now have a more even ratio of the two classes of assets, which will help some investors to reorient to shares.

Funds can increase equity investments in several ways, including selling bonds to buy shares, using cash in their portfolios or investing fresh money in stocks, said Leo Acheson, director of mixed asset ratings at Morningstar.

According to Acheson, many of the portfolio managers do not wait for the end of the quarter to make adjustments, but instead review their portfolios daily and adjust the ratio of stocks and bonds to maintain the desired level of risk.

“As managers rebalance and redistribute funds in favor of shares in order to return to their strategic relationship … this may provide support for the shares,” he said.

U.S. stocks jumped more than 17% last week, stepping back from recent lows after unprecedented stimulus measures by the Federal Reserve, and after the Senate passed a bill on support measures of $ 2 trillion to help the unemployed and industries affected by coronavirus pandemics. Few people believe that the volatility in the markets is over, since the outbreak trajectory remains uncertain, and the economic consequences can be huge.

However, the Fed’s promise to buy billions of dollars in bonds, including $ 75 billion in Treasury securities per week last week, could be an incentive for those who want to rebalance their portfolio.

“You buy stocks at significantly lower prices than they did before and sell bonds that are artificially bought up by the Federal Reserve,” said Michael O’Rourke, chief market strategist at JonesTrading in Stamford, Connecticut.

The flows generated by rebalancing, apparently, have a noticeable effect on asset prices, especially when the dynamics of bonds significantly outperforms the dynamics of stocks, as happened until March.

The S&P 500 grew by almost 7% over the last five days of each month, in the first weeks of which bonds showed the dynamics better than the stock by at least 10%, said Christopher Murphy of Susquehanna Financial Group, citing eight such cases since 1990.

Pension funds, endowment management funds, and charitable foundations that manage assets of up to $ 15 trillion are among those who often seek to adjust their portfolios by the end of the quarter, said Steve Foresty, investment director at Wilshire Consulting.

“Ceteris paribus, the share (in portfolios) of these institutions is pretty much lower than the target, which means they need to buy in order to get back to their goal,” Foresti said.

“Of course, there are some natural buying and selling around these rebalances.”

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