By Thomas Richter
Over the last three years there has been an ongoing discussion about the stability of the asset management industry and to what extent funds and asset managers should be considered systemically important. Recently we saw a significant correction of the approach by the Financial Stability Board (FSB) away from judging systemic importance based on size. This is huge progress compared to FSB’s original methodology to assess systemic risk.
The FSB has been asked by the G20 to identify all systemically important financial institutions, or so-called ‘SIFIs’. Over 30 banks and a dozen insurance companies have already been identified, so some might ask why this list should not be extended to the fund industry in order to increase stability? But this approach is wrong. Asset managers do not have clients’ assets on their own balance sheets. Therefore, if the solvency of an asset management company deteriorates, clients’ assets wouldn’t be affected as they are shielded from the manager’s insolvency and held in dedicated accounts by the appointed depositary or client’s custodian. Even if investors started to withdraw their money, a chain reaction affecting the stability of the sector or wider capital markets is far from realistic. The asset management industry is heavily fragmented, the top five players only account for 17%of the global fund market. Even the top 30 biggest companies have a collective market share of 50%, according to Towers Watson. On a product level, the market power of each individual fund also seems rather small. The funds listed in Germany for example, only hold 8.1% of the German stock indices Dax, MDax, SDax or TecDax. So, even if one large fund manager or fund gets into difficulty it’s likely that the impact on the wider industry would be minimal.
If the size-based approach doesn’t work, what can be done? Instead of a top-down strategy, which will most likely lead to collateral damage, it is important to look at a number of different measures that could most effectively stabilise the investment industry. What we need is a bottom-up approach: Each asset class and fund type haves their own risks and therefore need to be looked at specifically. The focus should be on minimising the risks in trading activities, leverage issues and liquidity risks.
Fund categories investing in illiquid assets for example could be stabilised by introducing minimum holding periods and notice periods for redemptions. Another measure could be to implement fixed redemption periods potentially combined with redemption gates in order to make redemption effects more calculable. Similar activities were successfully implemented amongst German property funds which experienced liquidity problems following the financial crisis. This category has been stabilised by the introduction of holding and notice periods. In any case, it is vital that regulators assess the risks on the basis of specific investment strategies and other relevant features of a product. Along with other industry members, we are eagerly awaiting first results of the re-focused work at the FSB. We are very much in favour of anything that can better stabilise the industry in the light of increased market volatility. But a more targeted method needs to be put in place rather than the outdated size-based top-down approach.
Thomas Richter is CEO of BVI (Bundesverband Investment und Asset Management)
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