Commercial fund management organizations hit back at IMF systemic risk warning

The International Monetary Fund’s warning that open-ended funds pose systemic risk to financial markets is based on “hypothetical and flawed assumptions”, say two influential asset management trade bodies.

IMF October 4 blog post described a $41 billion wave of risk for the global sector – noting that open funds holding hard-to-sell assets can “magnify the impact of shocks”, while those investing in less liquid assets that can take days to sell risk a “liquidity mismatch” where a wave of investors rushes out all at once. The IMF warnings come amid growing investor withdrawals as central banks take steps to tackle soaring inflation.

The IMF’s arguments are not new, having been around for more than a decade since an overhaul of financial rules in the aftermath of the global financial crisis, the European Funds and Asset Management Association, which represents the industry European investment of 31 billion euros, told Financial news.

“They have not stood up to closer scrutiny because they continue to be largely based on hypothetical – and flawed – assumptions about how portfolio managers and their clients behave during episodes of market turmoil. “said the trade body.

Efama said that although there may be liquidity mismatches in open-ended bond funds, these have generally been managed using tools such as swing pricing, which can reduce liquidity. first-mover advantage when a large number of investors wish to exit during periods of market stress.

“The forced fire selling and resulting feedback loops…simply didn’t materialize and for good reason: they would ultimately harm the very same investors who choose to stay invested and significantly undermine the fund’s strategy,” Efama said.

“No two investors are alike and there is no confirmation that bond fund investors are all rushing out at once. bond funds can be well diversified…to decisively refute run-risk theories.

Sean Collins, chief economist at the Investment Company Institute – the trade body representing the US mutual fund industry – said bond funds had weathered previous market stresses, such as the onset of the Covid pandemic in March 2020.

“The suggestion that bond mutual funds were a significant part of the problem in the Treasury market or the corporate bond market in the United States was grossly overstated,” Collins said. FN.

Bond fund outflows have increased significantly recently with Refinitiv Lipper data reported by Reuters showing investors pulled in $175.5 billion globally in the first nine months of this year – the largest outflows in two decades.

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“These are very large outflows, but there’s no indication that bond mutual funds or any other type of open-end fund were the source of the stress the market has been experiencing,” Collins said.

“Leaving open the implication that they could – or perhaps have been – part of the constraints is dishonest. We know what is causing the tensions – it is the tightening of monetary policy and the fact that inflation has moved away from central banks. It’s also the war in Ukraine, oil prices, supply chain issues – that’s where the problems are.

The IMF warning came after a handful of asset managers imposed limits on how much large investors can withdraw from their UK property funds.

BlackRock, Columbia Threadneedle and Schroders have all put restrictions in place to deal with an increase in redemption requests from pension fund customers, as they seek to withdraw their money in the face of market volatility and rising prices. interest rate.

The measures, which include the deferral of payments to investors looking to exit, come as pension funds seek to reduce their exposure to less liquid assets, with rate hikes leading to a drop in appetite for high-risk investments such as real estate.

This is not the first time that the fund management industry has been singled out as a potential threat to market stability.

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Regulators have previously focused on the exchange-traded fund market, with watchdogs in the UK, Ireland and France having taken a closer look at this booming sector in recent years.

The French AMF concluded in 2017 that while ETFs do not pose an immediate threat to market stability, “sustained vigilance” will be required during periods of market stress.

A separate study by the UK’s Financial Conduct Authority in 2019 also found little evidence that the ETF sector poses a serious threat to market stability.

To contact the author of this story with comments or news, email David Ricketts

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