J.P.Morgan: Any Month-End Rebalancing Flow Should Be Modest

J.P.Morgan have noted that "as we approach month-end, the rebalancing flow question resurfaces among clients given the 5% rally in equities MtD. Balanced mutual funds such as 60:40 funds are the ones that tend to rebalance on a monthly basis or so. We previously proxied this universe via the universe of all hybrid funds. However, beyond balanced mutual funds, the hybrid fund universe also contains flexible portfolio funds, mixed income funds and asset allocation funds that have less strict rebalancing frameworks. In the U.S., balanced funds account for 45% of the hybrid fund universe. Applying the same proportion to the global hybrid universe of $7.8tn, would imply a balanced fund universe of around $3.5tn globally. So going forward, to be more conservative we will use this $3.5tn AUM as an estimate of the universe of balanced funds globally."

• "Given the 5% rally in equities MtD it would be natural to expect some rebalancing flow (equity selling this week). However, this equity selling is likely to be small for two reasons. First, bonds also rallied on the month. Second, balanced mutual funds appear to have been exhibiting a rather neutral equity exposure in recent weeks, far from the overweights of last December or last February. Assuming they were fully rebalanced at the end of March, which is a reasonable hypothesis given the equity betas, and by taking into account the performance of global equities and bonds MtD, we estimate around $30bn of equity selling by balanced mutual funds globally into the end of April, which is rather modest by historical standards."