{
  "title": "IMF Survey : Plain Vanilla Investment Funds Can Pose Risks",
  "publication": "IMF News, April 8, 2015",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol040815b",
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  "summary": "Even simple investment funds such as mutual funds can pose financial stability risks, and regulators need to know more about them through hands-on supervision, and better data and oversight, according to new research from the International Monetary Fund.",
  "publishDate": "2015-04-08",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Publication date: April 8, 2015\n- Summary: Even simple investment funds such as mutual funds can pose financial stability risks; regulators need more hands-on supervision, better data, and improved oversight, according to IMF research for the Global Financial Stability Report.\n- Context: Asset management industry plays a rising role in the financial system with benefits and risks; debate intensified about risks from less leveraged, “plain-vanilla” investment products such as simple mutual funds and exchange-traded funds investing in bonds and equities."
    },
    {
      "heading": "Size and scope",
      "content": "- The industry manages over $75 trillion assets globally, exceeding 100 percent of world GDP.\n- Bond funds have grown significantly, investing in less-liquid assets such as emerging market bonds and high-yield corporate bonds.\n- Many funds allow investors to redeem on a daily basis, increasing the mismatch between the liquidity of funds’ assets and liabilities.\n- Large redemptions—possibly triggered by an external event, such as a faster-than-anticipated rise in interest rates in the United States—may have widespread market impact, especially if banks are unable or unwilling to step in to provide liquidity."
    },
    {
      "heading": "Key findings: Understanding the risks",
      "content": "- Distinction: Important to distinguish risks introduced by the presence of funds from risks that would exist if investors bought securities directly.\n- Market impact: Mutual fund investments affect asset prices, at least in less-liquid markets such as emerging market bonds; mutual fund flows drive price movements in these markets.\n- Concentration effects: Prices of assets that are held in a concentrated manner by funds drop more sharply during periods of market nervousness.\n- Redemption/run risk:\n  - Easy redemption options offered by funds can exacerbate the risk of a run by investors wanting their money all at once, compared to investors holding assets directly.\n  - Some funds have asset-valuation and share-pricing practices that provide a “first-mover” advantage to investors—investors redeeming earlier than others can recover more money.\n  - Mitigants: “Riskier” funds—those investing in illiquid assets and more vulnerable to runs—protect themselves by holding more liquid assets and charging higher redemption fees.\n  - Redemption fees are indeed effective in mitigating redemption pressures during stress periods.\n- Incentive and herding problems:\n  - Delegation of day-to-day portfolio management introduces incentive problems between end investors and portfolio managers.\n  - Asset managers may engage in herding—trading in the same direction as their peers.\n  - Measures of herding behavior have risen in the past few years, possibly because of a generalized search for yield in a low-interest environment that drove funds to invest in similar assets.\n- Size versus asset composition:\n  - Unlike banks, larger funds and funds belonging to larger asset management companies do not necessarily contribute more to systemic risk.\n  - The nature of the assets they invest in appears to be relatively more important than size for systemic risk considerations."
    },
    {
      "heading": "Policy recommendations and supervision",
      "content": "- Shift focus: Oversight currently focuses on investor protection and disclosure; regulators conduct little monitoring in most countries. Securities regulators should shift to a more hands-on supervisory approach with better data, risk indicators, and analysis, including stress testing.\n- Macroprudential approach: Policymakers and regulators should adopt a macroprudential approach to assess the impact of the industry as a whole on financial system stability.\n- Re-assess tools: Supervisors and regulators need to re-assess the role and adequacy of existing risk management tools.\n- Reduce run incentives:\n  - Regulators should find ways to reduce the incentive for investors to withdraw their money when they see others exiting.\n  - Possible measures: well-designed redemption fees that do not hurt investors overall (for example if the revenue accrues to the fund’s net asset value).\n  - Fund share pricing should be set so that exiting investors do not pass on the cost of liquidity to remaining ones.\n- Establish global standards: Establishing global standards on how to monitor and supervise the industry is essential."
    },
    {
      "heading": "Additional note",
      "content": "- The IMF will release further work from the Global Financial Stability Report on April 15.\n\nIMF Survey : Plain Vanilla Investment Funds Can Pose Risks — April 8, 2015 (International Monetary Fund)\n\n---\n\n Content in this bundle\n\n- Pol040815bapdf (PDF){rel=\"external\" type=\"application/pdf\"}\n- C3pdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- Policy\n- More about investor behavior\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol040815b"
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    "Published: April 8, 2015",
    "Publication date: April 8, 2015",
    "Summary: Even simple investment funds such as mutual funds can pose financial stability risks; regulators need more hands-on supervision, better data, and improved oversight, according to IMF research for the Global Financial Stability Report.",
    "Context: Asset management industry plays a rising role in the financial system with benefits and risks; debate intensified about risks from less leveraged, “plain-vanilla” investment products such as simple mutual funds and exchange-traded funds investing in bonds and equities.",
    "The industry manages over $75 trillion assets globally, exceeding 100 percent of world GDP.",
    "Bond funds have grown significantly, investing in less-liquid assets such as emerging market bonds and high-yield corporate bonds.",
    "Many funds allow investors to redeem on a daily basis, increasing the mismatch between the liquidity of funds’ assets and liabilities.",
    "Large redemptions—possibly triggered by an external event, such as a faster-than-anticipated rise in interest rates in the United States—may have widespread market impact, especially if banks are unable or unwilling to step in to provide liquidity.",
    "Distinction: Important to distinguish risks introduced by the presence of funds from risks that would exist if investors bought securities directly.",
    "Market impact: Mutual fund investments affect asset prices, at least in less-liquid markets such as emerging market bonds; mutual fund flows drive price movements in these markets.",
    "Concentration effects: Prices of assets that are held in a concentrated manner by funds drop more sharply during periods of market nervousness.",
    "Redemption/run risk:",
    "Incentive and herding problems:",
    "Size versus asset composition:",
    "Shift focus: Oversight currently focuses on investor protection and disclosure; regulators conduct little monitoring in most countries. Securities regulators should shift to a more hands-on supervisory approach with better data, risk indicators, and analysis, including stress testing.",
    "Macroprudential approach: Policymakers and regulators should adopt a macroprudential approach to assess the impact of the industry as a whole on financial system stability.",
    "Re-assess tools: Supervisors and regulators need to re-assess the role and adequacy of existing risk management tools.",
    "Reduce run incentives:",
    "Establish global standards: Establishing global standards on how to monitor and supervise the industry is essential.",
    "The IMF will release further work from the Global Financial Stability Report on April 15.",
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    "[https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Policy](https://www.imf.org/en/news/search)",
    "[More about investor behavior](http://www.imf.org/external/pubs/ft/survey/so/2014/POL033114B.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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