IA dismisses IMF stress test call on asset managers

In the latest 135-page IMF Global Financial Stability Report, published bi-annually, the IMF called for the introduction of stress tests on asset managers, similar to those in place for the banking system based on the view that risks for global stability associated with the industry are on the rise.

It said the risks were rising along with the size of the asset management industry, which buys and sells securities totalling US$76trn (£51.8trn), the equivalent of global GDP and a rise of 40 per cent more than 10 years ago. The biggest fund manager, BlackRock, handles US$4.7trn (£3.2trn).

According to the IMF report, 41 per cent of the total assets under management are open-ended mutual funds, while ETFs are at 4 per cent. The report also spoke of a lack of transparency over synthetic ETFs as a potential risk.

The report stated that the protected period of low interest rates and structural changes in the financial system had led investors in search of good yields. This meant that funds had loaded up on less liquid assets that they might struggle to sell off in times of financial stress.

The IMF called on regulators to provide a clearer definition of “liquid assets” and to give greater guidance over how to match the liquidity profile of each fund category with its redemption policies.

However, Richard Metcalfe, IA director of regulatory affairs, said the differences between asset managers and banks were too vast for stress testing to be applicable for both.

“We have argued that it is hard to say what the destination is if we do not know what the remedies are,” he said.

There was also concern with mutual funds moving into bonds, where price disruptions had “potentially larger consequences than large price swings in equity markets”, Mr Metcalfe added.

Last month 300 global managers said in a CFA UK study that bonds were overvalued.

Asset managers BlackRock, Vanguard and Pimco, who billions of dollars of bond holdings, said they were relatively sanguine about the threat to the bond markets.

Vanguard has a US$497bn bond exposure, Pimco has a US$404bn exposure and BlackRock US$139bn.

Josh Ausden, head of content at FE Trustnet, said: “While bonds remain extremely popular with fund managers hunting for yield, we’re seeing some experts shunning the asset class completely.”

Background View

Last year, IMLA’s December 2014 market research had found that 56 per cent of brokers reported an increase in the volume of cases placed with specialist lenders relative to summer 2014, ahead of 49 per cent with regional/local building societies, 48 per cent with national building societies, 38 per cent with high street banks and 36 per cent with challenger banks.