Regulated funds do not pose systemic risks even in times of crisis. On the contrary, they proved resilient in the financial crises of 2008 and 2011 as well as during the Corona-related market turmoil being able to effectively cushion economic shocks. Existing European sector-specific rules and additional national rules for asset managers provide a robust framework, according to an analysis BVI provided to the Financial Stability Board (FSB) in response to the FSB’s Call for papers.
The analysis examines the resilience of funds in times of crisis using practical examples.
It illustrates, that neither German ‘Spezialfonds’, which record just under 2.2 trillion Euro in fund assets and account for around two-thirds of the German fund market, nor retail funds posed any contagion risk to the financial system during market crisis of the past decades. Due to low market shares in Europe and Germany respectively, hedge funds and money market funds are not subject to the analysis.
‘Spezialfonds’ stabilise the financial market
Our analysis contradicts the widespread assumption that institutional investors in ‘Spezialfonds’ would simultaneously reallocate large asset units in periods of stressed markets and thus trigger a ‘herd behaviour’ among other investor groups. A comparison of the monthly net flows of different institutional investor groups in‘Spezialfonds’ with those of retail investors since 2000 illustrates that the respective investor groups hardly influenced each other in their investment behaviour. In addition, a comparison with the ‘Financial Stress Index’ of the US Treasury Department over the same period shows that the level of market stress had hardly any influence on net inflows into special funds. Apparently, this is due to the stable supply of pension contributions and insurance premiums to institutional investors such as pension schemes and insurance companies which these investors allocate in funds on a long-term and anti-cyclical basis. As a result, ‘Spezialfonds’ were able to achieve stable inflows even in periods of market stress such as 2008 and 2011. Insurance companies, for example, invest conservatively and prefer low leverage due to legal requirements, which also has a stabilising effect.
Open-ended retail funds well protected against liquidity risks
Most open-ended retail funds have so far been able to successfully manage their liquidity risks even in case of daily redemptions of fund units. As early as 2010, we examined the liquidity management of various types of securities funds such as equity, bond or mixed funds by comparing the funds' liquidity ratios with the outflows resulting from redemptions off und units and based on historical data. In 2015/2016, we extended this approach to open-ended real estate funds. The result suggests, that a liquidity ratio of 20 percent was sufficient to be able to cushion even larger redemptions. Even after the 2008 financial crisis, the fund companies were able to service almost all redemptions without using additional liquidity management tools. In the meantime, German open-ended real estate and securities funds additionally benefit from an expanded toolbox for liquidity management.
For further political discussion we recommend
- to retain flexibility in terms of eligible exposures and liquidity management,
- financial stability supervisors to operationalise their macro-prudential toolkit,
- to make liquidity management tools available to all jurisdictions,
- to create a common understanding on how to calculate leverage in investment funds,
- to establish a single regulatory reporting mechanism which would reduce operational effort and burden for asset managers as well as supervisory authorities.