BlackRock, the largest asset manager in the world, is pushing back against mounting concern that asset managers are set for severe investor outflows when interest rates eventually begin to rise.
Like many asset managers, BlackRock has ballooned in size by hoovering up corporate bonds as companies have taken advantage of low interest rates to issue large amounts of debt.
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Analysts fret that when interest rates rise investors will rush for the exit, forcing asset managers to sell into a distressed market plagued by liquidity issues that hamper the ability to offload assets without further impacting their price.
Regulators across the globe have called for greater scrutiny of asset managers, highlighting reduced liquidity in markets as a concern should bond funds have to exit positions quickly.
“The likelihood of the scenarios that have been outlined actually occurring is incredibly low,” said Barbara Novick, vice-chairman of BlackRock. “The data actually shows that there is a tremendous amount of mutual fund money in retirement accounts which tend to be extremely sticky and not moved around much at all.”
Retirement money accounted for 46 per cent of the $13.1tn in mutual fund money at the end of the first quarter this year, up from 40 per cent in 2008, according to data from the Investment Company Institute.
ICI data also suggests that the largest outflows from bond mutual funds in a single month was 2.4 per cent in October 2008. But some are not convinced that history will be repeated.
“Regulators are looking at asset managers in anticipation of possible redemptions because we have seen unprecedented inflows and they are much larger,” said Marcus Stanley, policy director at Americans for Financial Reform. “It’s not the same situation as the historical precedent.”
The data actually shows that there is a tremendous amount of mutual fund money in retirement accounts which tend to be extremely sticky and not moved around much at all
– Barbara Novick, vice-chairman of BlackRock
BlackRock, along with other asset managers, has persistently rejected claims that it poses any systemic risk but accepts the view that liquidity is not what it once was, even calling for heightened disclosure standards to alert investors to liquidity risks.
“It is not something we are refuting in the least,” said Richie Prager, head of trading and liquidity strategies at BlackRock. “But we are concerned that the tone of comments is unnecessarily shrill.”
In a paper released on Friday they propose an array of solutions to the problem. Some are defensive, designed to cover potential outflows, and reference increased credit lines with banks and funds holding more liquid assets, like cash and US Treasuries. It also calls on regulators to adopt standardised stress tests for funds, similar to those in Europe.
But other proposals are more ambitious, encouraging asset managers to radically change the way they trade fixed income, pushing for greater adoption of electronic platforms, to improve the buying and selling of bonds.
“The thesis of what we are saying is really, lets define what we are talking about, lets stop looking backwards, lets tone it down, and quite frankly lets look forward,” added Prager.