Measuring The Impact Of Mutual Funds On Bonds
Additionally, it is important to consider several other factors. First, asset management is just one actor within the corporate bond market space. Based on Figures 8 and 9, bond funds make up a small proportion of global market bonds sales. Second, the investor composition of the market is an important consideration. We would be less concerned with an investor composition that has a buy to hold strategy than one focused on trading.3
In an attempt to tackle this issue, the US Securities and Exchange Commission’s Division of Economic and Risk Analysis published a staff paper, which examined the US mutual fund industry with particular attention to fund flows, the liquidity of fund portfolios, and the interaction of those characteristics. The SEC staff noted that mutual funds in investment categories that hold potentially less liquid assets are growing quickly and often have volatile flows. Alternative strategies have both the highest average net flow and the highest average net flow volatility of any investment category. Among many other empirical results, the analysis showed that the liquidity of the equity portfolio of US equity funds is greater when flow volatility is greater and that the liquidity of those same portfolios decreases after large outflows. While the SEC staff analysis of the US fund industry provides significant insight into recent experience with equity portfolios, gaps in our understanding regarding vulnerabilities associated with asset managers remain.
On one side of the coin, corporate bonds remain a popular vehicle for corporations to finance themselves. On the other side, those same corporate bonds remain quite attractive to end-investors, including mutual funds, but concerns about how the two could interact in stressed times remain.
It is important to take a holistic approach to the markets, and consider all actors and the substantial changes in the market environment caused by unprecedented monetary policy, a significant wave of reforms, and heightened innovation.
Significant data gaps exist, leaving important questions unanswered. As highlighted above, the debate around a lack of secondary market liquidity in corporate bond markets is by no means finalised. Nor is the debate on the role of funds´ interaction in this market. Many significant options exist in the asset management industry (such as internal liquidity management practices including stress testing) and regulatory policy tools that aid fund managers in meeting this liquidity mismatch and redemptions.
Data also show that mutual funds generally experience greater net inflows than outflows and, in aggregate, enjoy a stable investor base. Additionally, funds’ investments in portfolio assets do not currently represent a large portion of the market for these assets as a whole.
IOSCO is continuing to work on a number of these issues, alongside other standard setters, namely the Basel Committee for Banking Supervision (BCBS), the Committee for Payment and Market Infrastructures (CPMI) and the International Association of Insurance Supervisors (IAIS). Furthermore, IOSCO is contributing to the work of the Financial Stability Board (FSB), as well as doing work directly for the G20 Leaders, to address these emerging issues.
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