Professional portfolio managers’ own agendas and their efforts to maximize their own benefits lead them to rebalance portfolios and window-dress in a predictable way throughout the year
Say you are a portfolio manager and January to April you are up 15 per cent for the year . What will you do to safeguard your Christmas bonus considering plenty of signs of market exuberance amid economic and geopolitical risks?bottom up have started to worry top down – that is, they worry about macro and global risks. And there are a lot of top-down worries now.
One needs to understand the powerful drivers of this phenomenon before casting a negative opinion of it – and I have seen a lot of commentary in the media ridiculing the belief in its existence. This seasonal pattern rests on human psychology and the conflicts of interest of professional portfolio managers.
Later in the year, portfolio managers lock in returns by divesting from lesser-known, risky stocks and replacing them with well-known and less risky stocks or risk-free securities, such as government bonds. Such behaviour affects prices and security returns in a predictable way. Risky stocks and high-risk bonds are, on average, bid up early in the year and down later in the year, whereas low-risk stocks and risk-free bonds exhibit the opposite behaviour – down early in the year and up later.
Such seasonal behaviour in security returns is difficult for the markets to fully eliminate for two reasons.
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