Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 403

Mind the bond/equity rebalancing gap

At the end of the first quarter of 2021, the MSCI World equity index had returned 55% (total return in USD) over 12 months, while the return of the Bloomberg Barclays Global Aggregate (bond) index was just 4.7%, giving equities a 48% outperformance (see Exhibit 1).

Rebalancing required

The quarter-on-quarter gap between equity and bond returns through the end of March 2021 was 9.2% compared to 12.4% in the previous quarter. The most significant change in the pattern of returns is that the equity outperformance over the last year came primarily in 2020, while the underperformance of bonds was greatest in the first quarter of 2021.

This divergence will require many institutional investors to rebalance their portfolios to attain their preferred allocation. This will be particularly true for insurance companies and pension funds that typically follow quite closely to a 50-50 split between bonds and equities in their allocations.

In the US, this split has rarely varied by more than a few percentage points and the allocation to corporate bonds and US Treasuries has been similarly stable (see Exhibit 2).

Given that equities generally outperform bonds over time, achieving this target allocation (instead of maximising total returns) inevitably requires redemptions from equities and purchases of bonds.

Indeed, since the GFC, institutional investors have bought bonds every year, but they bought equities only twice and then only in small amounts (see Exhibit 3).

No meaningful impact

What might we expect in terms of fund flows in the upcoming quarter as US insurance companies and pensions align their allocations with the allocations they had at the end of 2020?

Assuming funds flows in the first quarter of 2021 were the same as in the last quarter of 2020, and applying the relevant index returns to the existing asset base, in the absence of rebalancing, we estimate allocations to:

  • equities would be 0.4% above target
  • corporate bonds would be 0.3% below target
  • Treasuries would actually be in line (the decline in the value of the Treasury portfolio due to rising rates has largely been offset by new bond purchases).

To restore the allocations, US institutional investors would need to buy about USD11 billion in Treasuries, USD58 billion in corporate bonds and redeem USD69 billion in equities.

These figures are only a percentage of typical purchases and redemptions, so we do not expect a meaningful impact on the market from institutional investor portfolio rebalancing this quarter.

 

Daniel Morris is Chief Market Strategist at BNP Paribas Asset ManagementThis article was first published on 6 April 2021 on Investors’ Corner.

This information is issued by BNP PARIBAS ASSET MANAGEMENT Australia Limited ABN 78 008 576 449, AFSL 223418. The information published does not constitute financial product advice, an offer to issue or recommendation to acquire any financial product. You will need to seek your own advice for any topic covered in the article. Investing in specialised sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

 

  •   14 April 2021
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Why investors will continue to pay up for the US market and Mag 7

10 key investment themes for 2022

10 key themes for 2021

banner

Most viewed in recent weeks

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

3 ways to defuse intergenerational anger

With the upcoming budget increasingly likely to include bold proposals to alter the tax code I’ve outlined three incremental steps with fewer unintended consequences.

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Little‑known government scheme can help retirees tap into $3 trillion of housing wealth

The Home Equity Access Scheme in Australia allows older homeowners to tap into their home equity for retirement income, yet remains underused due to lack of awareness and its perceived complexity.

Welcome to Firstlinks Edition 655 with weekend update

Many investors are on edge as geopolitical turmoil continues to impact markets, often leading to short-sighted actions. These are the three quotes that I’ve relied on during periods of volatility.

  • 26 March 2026

Latest Updates

Retirement

2 billion reasons to fix retirement income

A proposal to address Australia's 'stranded balances' in retirement by requiring super funds to transition members to pension phase at 65, boosting retirement income and reframing super as a source of income.

Investment strategies

Not much alpha left in this bet

Google redefined advertising with its innovative business model, but its dominance is now under siege from AI competitors and shifting market dynamics.

Five simple reasons why Australian cash rates are highest

Australians are suffering the highest cash rates amongst their rich country peers for five simple reasons, including outdated inflation targeting and undisciplined monetary and fiscal policies.

Investment strategies

Spending big on AI: So where’s the proof it’s working?

Business leaders must reassess AI's return on investment using new frameworks that reflect productivity, capability shifts and long-term value creation.

Economy

Double down on renewables?

Global volatility has sharpened Australia's focus on energy security. Calls for domestic fuel production clash with renewable energy goals, sparking a debate on balancing traditional and sustainable energy sources effectively.

Investment strategies

Private Credit headwinds move onshore

It’s been a volatile couple of months in markets with the ongoing conflict in Iran. For Australian private credit investors, however, large exposures to real estate lending could mean the worst is yet to come.

Property

Five reasons unlisted commercial property is an attractive allocation in uncertain times

Cromwell takes a look at replacement cost as a practical lens on relative value in commercial property. When build-new costs rise faster than asset pricing, the gap can create opportunities in well-located existing assets.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.