Is there a crisis brewing in the asset management industry? Such questions are heard more at conferences and events, reflecting disquiet as the euro crisis recedes and we approach the tenth anniversary of the collapse of Lehman Brothers.
Crises may arise from excessive leverage, from product opacity with asymmetric risk, or from concentrated positions in overbought assets. Questions around product opacity and hype are pertinent for the asset management sector, no less so in light of the recent proliferation of quant and smart beta products.
One simple thesis is that investors may panic if equity markets turn and a large volume of retail investors head for the exit, causing a liquidity squeeze.
Yet Ted Truscott, CEO of Columbia Threadneedle Investments, assured an Investment Company Institute conference in the US in May that mutual fund investors would not be rushing to sell: “They don’t panic and run to liquidate their investments, they don’t intensify the crisis.”
But in fixed income there is evidence of a fall in liquidity, as reported by the UK Financial Conduct Authority in a 2017 study on UK corporate bonds. It found a decline in dealer quote rates on some platforms and evidence to back anecdotal reports of increased failed buy-side trades. This could be structural, as the impact of banking regulation takes effect.
Others have reported that safer assets trade less, block trading declined and dealer inventories are lower, although a Federal Reserve Bank of New York staff report from October 2017 found that Treasury market liquidity is good by historical standards.
Speaking at the annual conference of the International Capital Markets Association in June, Han Rijken, global head of credit at NN Investment Partners, said: “We assume there is a lot of liquidity in the products we sell but we know that, especially on the bond side, the inventory of bonds is going down. If there is a crisis and we all went to go to the door it will be a mess.”
For now, investors will be well placed to think hard about liquidity in their portfolios and to expect further scrutiny from regulators.
Liam Kennedy, Editor