Fund management companies that invest billions of pounds of savers’ money pose a threat to global financial stability and regulators should police them more closely, according to the International Monetary Fund.
Delegating day-to-day investment decisions to large asset managers, as pension funds and many individual savers do, “introduces fundamental incentive problems between end investors and fund managers, which can induce destabilising behaviour and amplify shocks,” the Washington-based organisation says.
Asset management has so far largely escaped the more intrusive regulatory regime introduced for banks in the wake of the global financial crisis.
But in a chapter from its twice-yearly Global Financial Stability Review (GFSR), released on Wednesday in advance of its spring meetings next week, the IMF identifies fund managers as a key risk – even those offering “plain vanilla” products rather than exotic investments such as hedge funds.
It believes that “herding” behaviour – as fund managers charge into the same asset classes simultaneously in order to hit their performance targets – is “prevalent and increasing” – particularly in emerging market assets.
This herding can lead to sudden reversals as market conditions change, and the tendency of individual investors to pull their money out of under-performing funds can give these laggards an incentive to take bigger risks, the authors argue.
The report also claims that clients of fund management firms can sometimes have an incentive to get out fast when trouble strikes, posing another risk. “Some factors point to the existence of incentives to run in segments of the industry.”
“Large-scale sales by funds may exert significant downward asset-price pressures, which could affect the entire market and trigger adverse feedback loops,” it warns.
The IMF suggests that as well as checking up on the safety of financial products to prevent customers being ripped off, watchdogs should look more closely at how they might affect market stability – forcing them to hold more liquid assets, and subjecting them to stress tests along the lines of those imposed on major banks, for example.
The IMF is also concerned that in many cases, asset management firms are owned by large banks, creating what it calls “potentially very influential and complex mega conglomerates”.
In a separate chapter of the GFSR, the IMF gives a cleaner bill of health to the global banking sector, which it says is tending to become more local, reducing the risks of cross-border shocks of the kind that rocked global financial markets in 2007 and 2008.
“The relative shift on the part of foreign banks away from cross-border lending and toward more local lending … has a positive effect on the financial stability of host countries,” it says.
This article was written by Heather Stewart, for theguardian.com on Wednesday 8th April 2015 14.30 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010