This page has been archived and commenting is disabled.

Q1 2012 Deja Vu: Pension Fund Rebalancing Suggests Window Un-Dressing Could Hurt Stocks

Tyler Durden's picture




 

As we previously expected, 2013 has started in a strikingly similar vein to 2012 and 2011 and we are nearing that deja-vu turning point once again. However, the extreme relative outperformance of stocks to bonds in Q1 suggests very sizable quarter-end pension-fund rebalancing flows - and perhaps today's ramp was perfectly presented to enable that into the next two days. UBS expects US defined benefit funds to do sizable Q1 quarter-end rebalancing - anticipating $29-35 billion of equity outflows and perhaps as much as $15-19 billion of fixed income inflows. Equity outflows should be dominated by domestic stocks, with $22-27 billion of large cap and $10-12 billion of small cap sales. Furthermore, reading through the recent 10K statements of large corporate pension sponsors, they note consistent, and growing, interest in liability-driven strategies and even full-blown de-risking - supporting high grade long and intermediate government and corporate bonds. Not only are the flows pointing in a similar direction but the catalysts are lining up too.

 

Via UBS,

Pension Related Q1 Rebalancing Estimates

Assessing pension asset allocation is as much art as science. Therefore, we provide ranges rather than a single number to account for the variability in the share of funds that rebalance their allocations regularly. Relative asset returns month-to-date and quarter-to-date are obviously the main driver of rebalancing activity; if equity and bond markets experience a strong bout of volatility between now and the quarter-end, the estimates below may look somewhat different.

Better US data and sentiment improvement in Europe help equities trounce bonds in Q1

 

Figure 1 explains why we expect significant outflows from equity: US stocks outperformed bonds by a very large margin. Curiously, Figure 2 shows that 2012 had started in a very similar manner with bond returns trailing stocks by about 10 percentage points going into Q1 quarter-end. Incidentally, the Q1 equities rally had very similar drivers in 2012 and 2013: better economic data in the US and improving sentiment in the eurozone.

 

Figure 2 shows that 2012 Q2 had brought a complete turnaround. By early June, stocks had given up all of its year-to-date gains while government bond yields plunged. The risk-off trade to start Q2 2012 was triggered by the funding troubles in Spain and exacerbated later on by the hung elections in Greece. Fast-forward to 2013, the eurozone is dealing with the crisis in Cyprus and waiting to see the resolution of inconclusive elections in Italy just as the Q2 is about to begin.

 

Figure 3 contains detailed returns for representative indices. Domestic equities clearly had the best performance in Q1, besting broad bond indices, which were slightly down, by a large margin. Given the 10-12% outperformance of US stocks over bonds, it is not surprising pensions could be expected to be large sellers of domestic equities.

The model pro-forma estimate is about $29-35 billion of potential outflows from equities versus up to $15-19 billion inflows into fixed income.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 03/26/2013 - 20:38 | 3379664 MrX
MrX's picture

this could hurt stocks too: http://vimeo.com/15056028

Tue, 03/26/2013 - 20:42 | 3379679 flacon
flacon's picture

That only leaves tomorrow and Thursday as the last two trading days before quarter end. 

Tue, 03/26/2013 - 21:09 | 3379767 Cult_of_Reason
Cult_of_Reason's picture

Re: "perhaps today's ramp was perfectly presented to enable that into the next two"

Today's tape was very mechanical, characteristic of an algo assisted mark-up.

But why "into the next two" and not "into the next three" days?

 

Tue, 03/26/2013 - 21:24 | 3379823 ihedgemyhedges
ihedgemyhedges's picture

Why not the next 3?  Uhhhhhhh, market closed on Friday.  No more daytrading for you rookie......

Tue, 03/26/2013 - 23:07 | 3380103 Cult_of_Reason
Cult_of_Reason's picture

I am not a rookie, just an atheist who keeps forgetting about catholic "Good Friday"; closing exchanges on "Easter Monday", as they do in Western Europe, would make more sense to me.

Also, it is not a Federal holiday (government and banks will be open), making it easier to miss.

http://www.opm.gov/policy-data-oversight/snow-dismissal-procedures/federal-holidays/#url=2013

 

Tue, 03/26/2013 - 23:10 | 3380112 ihedgemyhedges
ihedgemyhedges's picture

My rookie comment stands then....

Tue, 03/26/2013 - 23:54 | 3380157 Cult_of_Reason
Cult_of_Reason's picture

Whatever makes you feel better and reinforces your fragile self esteem...

Personally, I do not care (don't give a fuck would be a more accurate description) about whether your comment is standing, or your comment is flapping from one side to the other (and imitating your 9 millimeter bullet size penis).

Tue, 03/26/2013 - 23:30 | 3380146 Lewshine
Lewshine's picture

You being an athiest would mean being a rookie or not - really doesn't matter.  Athieism, the purposeless religion. LOL!

Tue, 03/26/2013 - 23:54 | 3380180 Cult_of_Reason
Cult_of_Reason's picture

All five major religions, as well as Greek Mythology, both original and modified by Romans, are fairy tales and myths.

Tue, 03/26/2013 - 20:41 | 3379677 IMA5U
IMA5U's picture

after cyprus, we must try again to blow up the market

Tue, 03/26/2013 - 20:46 | 3379691 Bill D. Cat
Bill D. Cat's picture

Nothing can hurt stocks .

Tue, 03/26/2013 - 22:07 | 3379960 max2205
max2205's picture

Q3=QE5

Tue, 03/26/2013 - 20:52 | 3379710 gmak
gmak's picture

Rebalancing doesn't have to take place in one day.  Pension managers aren't painted into a corner like that.  Rebalancing takes place over time.

Tue, 03/26/2013 - 21:07 | 3379756 jcaz
jcaz's picture

Never saw how a mutual fund works, eh?   We've done it in 45 mins......

Tue, 03/26/2013 - 21:34 | 3379860 ihedgemyhedges
ihedgemyhedges's picture

Two times in one day with no hat tip...............

Tue, 03/26/2013 - 15:37 | 3378477 ihedgemyhedges Vote up!

2
Vote down!

-1

One thing I've started seeing is mutual funds that are risk tolerance based i.e. Growth, Balanced, Moderate etc are nearing the max on their equity/bonds range.  One I looked at in particular (Balanced) was 55/45 at end of 2012.  It's now back up to 70/30.  New mutual fund flows aren't necessary yet to keep driving this sucker higher.  Throw in "International" mutual funds that may be selling off European cos and adding US cos and you got a bubble that keeps on growing...

Tue, 03/26/2013 - 22:14 | 3379978 gmak
gmak's picture

Notice how it says "doesn't have to take place in a day' didn't say - can't.   Were you small? if everyone is trying to exit the room at the same time they won't fit through the door.  I think you will find that for big re-balances it is done over a period of time. We're not talking about closet indexers adjusting a 1/2 percent in a stock or sector here or there.

Tue, 03/26/2013 - 22:23 | 3380007 gmak
gmak's picture

Notice how it says "doesn't have to take place in a day' didn't say - can't.   Were you small? if everyone is trying to exit the room at the same time they won't fit through the door.  I think you will find that for big re-balances it is done over a period of time. We're not talking about closet indexers adjusting a 1/2 percent in a stock or sector here or there.

Tue, 03/26/2013 - 20:54 | 3379714 ziggy59
ziggy59's picture

Dr. Bernanke Suess ...'Great Day fo UP'

Tue, 03/26/2013 - 20:56 | 3379726 q99x2
q99x2's picture

Put Bernanke in Stocks.

Tue, 03/26/2013 - 21:09 | 3379766 tenpanhandle
tenpanhandle's picture

I think the rack is more deserved.

Tue, 03/26/2013 - 21:27 | 3379834 HardwoodAg
HardwoodAg's picture

Sir, I agree. All of my tomatoes are canned in Ball jars. Mind if I toss jar and all?

Tue, 03/26/2013 - 21:04 | 3379748 tornado_watch
tornado_watch's picture

Who are the sellers again? If retail is home hiding in it corner, we are left with the Fed effects and momo machines. Reality need not reside here, which seems to be the complication when anyone tries to think about or justify the market action. Fund boys and girls are just along for the ride, sitting on their hands and thinking they'll time the top when it comes. Pensions happy to ride the way and help--alongside the very generous accounting package passed last year by Congress--with that, uh, slight problem they have with fundedness. There is no-one playing right now to call B.S. on this, not here, not anywhere. Everyone just getting paper rich and stripmining the market of any real world value and, so long as everyone continues to play along, creating wealth from thin air. Weimar did it for nearly three years before the world called B.S. on them... now everyone is playing the same game. 

Tue, 03/26/2013 - 21:14 | 3379780 tenpanhandle
tenpanhandle's picture

I must also do a repositioning.  I have to take all cash from checking, savings and the mattress and send to the IRS, on or before April 15th.  In essence, I must change my position from upright to bent over. 

Tue, 03/26/2013 - 21:15 | 3379793 earleflorida
earleflorida's picture

well, in my neck of the forest... evertbody wants to invest in rental property-- they're falling over each other trying to get in now! that's right... right now?

cash is king!!!

Tue, 03/26/2013 - 21:17 | 3379802 tenpanhandle
tenpanhandle's picture

Everyone wants in right before everyone wants out.

Tue, 03/26/2013 - 21:19 | 3379805 FieldingMellish
FieldingMellish's picture

Benny will print the difference. I am surprised that there is any assets left in pension funds anyhow.

Tue, 03/26/2013 - 21:23 | 3379818 HD
HD's picture

Just depressing.

"anticipating $29-35 billion of equity outflow"

Ben pumps in 21 billion a week. 


 

Tue, 03/26/2013 - 21:34 | 3379861 wcvarones
wcvarones's picture

What kind of asshole would buy bonds at these yields?

Tue, 03/26/2013 - 21:48 | 3379904 FieldingMellish
FieldingMellish's picture

Fund managers. The best kind of asshole.

Tue, 03/26/2013 - 22:44 | 3380064 Registered Inve...
Registered Investment Advisor's picture

We will buy intermediate term bonds again this year for the "sell in May and go away crowd".  Look at intermediate term bond fund performance in April-September the past 3 years. Classic RiskOff that can save you 10% a year, and Defined Benefit Plan advisors know this.  Fund flows are over analyzed, it is simply Risk On - Risk Off now a days.  Mindless lemmings

Tue, 03/26/2013 - 21:47 | 3379898 Piranhanoia
Piranhanoia's picture

"If it is UBS,  it is bullshit"

Tue, 03/26/2013 - 22:12 | 3379976 Tsar Pointless
Tsar Pointless's picture

So I shouldn't count on S&P 1750 then?

Instead, I should focus on S&P 1800?

Got it!

QE-4-EVA!

Wed, 03/27/2013 - 05:21 | 3380394 IamtheREALmario
IamtheREALmario's picture

"Risk on" and "Risk off" little inappropriate joke names, similar to Homeland Security (which is nothing of the sort) all of those congressional "modernization" acts, which are nothing of the sort and Barack Obama, which seemingly is not what it appears to be.

Do NOT follow this link or you will be banned from the site!