Pension funds may benefit from rebalancing

NEW YORK Reuters -- U.S. fixed income and international equities could benefit from quarter-end rebalancing as pension funds square their books after a rough three months for most asset classes, according to estimates from several Wall Street banks.

Credit Suisse expects to buy $30 billion worth of developed market equities and another $15 billion in emerging markets while trimming U.S. large-cap consumer discretionary stocks.

The US has fared better than its international peers on a relative basis, analysts at the firm wrote in a Thursday report.

Wells Fargo expects to move $10 billion into U.S. fixed income as the group's mean funded ratio - a projection of the gap between a fund's assets and future liabilities - rises to 107%, near its peak for the year.

Wall Street pays close attention to quarter-end moves by pension funds because of their potential market influence. According to the Federal Reserve, the U.S. state and local pension funds have $5.12 trillion in assets under management, and they are often rebalanced each quarter to maintain consistent asset allocations.

This year's market swings have presented a challenge to asset managers who are looking to square their portfolios against a benchmark or return to their long-maintained allocation of stocks versus bonds. The S&P 500 fell by 4.6% in the third quarter and lost 24.2% year to date, while the U.S. bond market - as measured by the $80.3 billion Vanguard Total Bond Market Index fund - is down 3% over the quarter and 14% for the year.

Marko Kolanovic, chief market strategist at JPMorgan, said that the twin declines in U.S. stocks and bonds will dampen investor rebalancing compared to prior periods, because allocations are likely to be stable.

He said that there could be a bounce of 1 -- 2% in stocks given the current low liquidity environment.