## IMF Survey : Plain Vanilla Investment Funds Can Pose Risks _IMF News, April 8, 2015_ ## Source details **Canonical URL:** [IMF Survey : Plain Vanilla Investment Funds Can Pose Risks](https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol040815b) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/53/sopol040815b/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/53/sopol040815b/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/53/sopol040815b/bundle-manifest.json) ## Bibliographic details - Published: April 8, 2015 --- ### Overview - 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. ### Size and scope - 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. ### Key findings: Understanding the risks - 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: - 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. - 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. - 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. - Redemption fees are indeed effective in mitigating redemption pressures during stress periods. - Incentive and herding problems: - Delegation of day-to-day portfolio management introduces incentive problems between end investors and portfolio managers. - Asset managers may engage in herding—trading in the same direction as their peers. - 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. - Size versus asset composition: - Unlike banks, larger funds and funds belonging to larger asset management companies do not necessarily contribute more to systemic risk. - The nature of the assets they invest in appears to be relatively more important than size for systemic risk considerations. ### Policy recommendations and supervision - 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: - Regulators should find ways to reduce the incentive for investors to withdraw their money when they see others exiting. - 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). - Fund share pricing should be set so that exiting investors do not pass on the cost of liquidity to remaining ones. - Establish global standards: Establishing global standards on how to monitor and supervise the industry is essential. ### Additional note - The IMF will release further work from the Global Financial Stability Report on April 15. *IMF Survey : Plain Vanilla Investment Funds Can Pose Risks — April 8, 2015 (International Monetary Fund)* --- ## Content in this bundle - [Pol040815bapdf (PDF)](/-/media/websites/imf/imported/external/arabic/pubs/ft/survey/so/2015/pol040815bapdf.pdf){rel="external" type="application/pdf"} - [C3pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/gfsr/2015/01/pdf/_c3pdf.pdf){rel="external" type="application/pdf"} --- ## References - [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) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol040815b_