IMF cautions that keeping illiquid assets by funds could jeopardize financial stability.
In addition, an investor who avoids daily-trading open-ended funds with difficult-to-sell assets during times of market stress could endanger the integrity of the global financial system, according to the International Monetary Fund (IMF).
In a sudden spike of major outflows driven by market volatility, the international body identified less regularly traded products such corporate bonds, some developing market assets, and real estate as posing the greatest danger.
The IMF stated in a blog post on Tuesday, October 4 that a “liquidity mismatch” might pose a significant problem for fund managers during a time of significant withdrawals.
“These investor runs could put pressure on funds to sell assets rapidly, which would drive down valuations even more. Thus, the initial shock’s effects would amplify and the financial system’s stability might be jeopardized “IMF stated.
According to the statement, “a fall in the liquidity of funds domiciled in advanced economies can have large cross-border spillover effects and raise the return volatility of emerging market corporate bonds.”
The flagship fund of Neil Woodford failed in 2019 in part due to an outflow of investors. The fund crumbled under the weight of withdrawal requests as concerns about the management’s performance rose since the manager had built up sizable positions in equities that were difficult to sell.
The IMF advised regulations such reducing the frequency of investor redemptions because funds holding particularly illiquid assets like real estate, calibrating swing-pricing or similar instruments, may be challenging even in normal times.
The warning follows news that asset managers, including Schroders, Columbia Threadneedle, and BlackRock, have to limit withdrawals from their institutional funds as liquidity once more becomes constrained across property funds.
The liquidity restrictions placed on their institutional counterparts have not been applied to retail open-ended property funds, and none of the UK-focused funds intend to limit withdrawals.
As they had done during the epidemic and the Global Financial Crisis, central banks shouldn’t intervene to support mutual funds, the IMF further cautioned.
