Institutional investors are less prone than retail funds to market-distorting behavioural quirks, according to a new International Monetary Fund (IMF) report, which nonetheless recommends greater prudential oversight of the industry globally.
The IMF report, titled ‘The asset management industry and financial stability’ study, published early this month, found institutional investors “appear to be less influenced by recent past performance” than retail funds.
“However, this result is not robust across all subperiods considered,” the study says.
But the report did say “retail-oriented funds” were far more likely to ‘herd’ – where investors blindly follow trends – than institutional investors.
“This could be because retail investors are more prone to quickly reallocate money from funds with poor recent performance to funds with high recent returns… possibly because it is more difficult for them than for institutional investors to assess and monitor portfolio managers,” the IMF paper says.
Despite the possibly-stabilising influence of institutional funds, the IMF report recommends the entire asset management business needs more regulatory oversight to identify any systemic ‘contagion’ risks posed by the industry – particularly from “global systemically important financial institutions” (G-SIFIs).
“The relative importance of the asset management industry has grown, and banks have also retrenched from many market-making activities, contributing to a reduction in market liquidity,” the report says. “Moreover, the role of fixed-income funds, which entail larger contagion risks than traditional equity investment, has expanded considerably.”
The IMF report says global regulators need to take a “macroprudential approach” to the funds management industry to assess its potential to derail the broader financial system.
“Currently, the oversight of the industry focuses on investor protection and disclosure, and regulators conduct little monitoring in most countries,” the study says. “Securities regulators should shift to a more hands-on supervisory approach with better data, risk indicators, and analysis, including stress testing, according to the IMF.
“Establishing global standards on how to monitor and supervise the industry is essential.”
In particular, the report recommends regulators impose fund redemption rules that discourage a rush to the exits during market panics.