Are Gigantic Money Managers a Systemic Risk?

The New York Fed sought to answer the question about whether or not fire sales of mutual funds could represent a systemic risk to our financial system. They conclude that, yes, it could.

One of the main reasons they cite is the jumpiness of the investor class – what with 2008 still being fresh on everyone’s mind. The authors explain that fund investors demonstrate a higher sensitivity to performance than ever before – sellers come out quickly when funds decline – we saw this with both stock and bond funds at the end of last summer.

The NY Fed calls the resulting fire sale of mutual funds “spillover vulnerability” (emphasis mine below):

One reason for the increase in spillover vulnerability is that mutual funds—bond funds in particular—have grown substantially since 2009. However, a decomposition of spillover losses themselves—as opposed to their ratio to initial losses—shows that asset growth is not the only relevant factor…

…the increase in the flow sensitivity to performance of the system has contributed as much to the increased vulnerability as the increase in aggregate assets. In other words, investors seem to have become more skittish since the crisis and are quicker to redeem shares, and in larger amounts, for a given degree of underperformance. The third factor, “illiquidity concentration,” captures how concentrated illiquid assets are in large funds with high flow sensitivity. The higher this concentration, the higher the “contagion” from funds selling illiquid assets to other funds. This third factor is also significantly higher today than before the financial crisis.

This jumpiness explains a lot of the recent volatility, as selling begets even more selling among funds that now control an enormous amount of assets.

Having spoken at numerous investment conferences over the last year, I can tell you that this is THE hot button issue amongst professional investors. Concentration of illiquid investments at funds where shareholder performance sensitivity is high means a lot more whippy action to come until either something really bad happens or people calm the hell down. You tell me which of those things happens first…

And speaking of systemic risk, no asset management firm is more emblematic of today’s concerns than BlackRock, which runs $4.6 trillion for investors around the world.

In a new research report, Morningstar says that BlackRock is not like any other investment manager in the world.

Here’s Dan Culloton (emphasis mine, again):

There has never been a money management firm like BlackRock. In fewer than 30 years the former unit of private equity firm Blackstone has used acquisitions and operational savvy to become the largest asset manager in the world, with $4.6 trillion in assets as of Dec. 31, 2015, and style-, vehicle-, strategy-, asset-class-, and globe-spanning capabilities. Its scale, breadth, expertise, and ambitions place it at the epicenter of most financial industry trends and debates. Local and national governments, sovereign wealth funds, and other institutional investors seek its input and advice and often use its risk-management tools.

With great size and complexity, however, come great challenges and responsibilities.

BlackRock, and it’s chief Larry Fink, spend a lot of time reassuring the public and the government that they are aware of the systemic risks and know what they’re doing. Carl Icahn and many other prominent market participants and journalists aren’t so sure.

The below links are today’s must-read articles for serious investors.

Sources:

Are Asset Managers Vulnerable to Fire Sales? (Liberty Street Economics)

A Unique Money Manager With Unique Challenges (Morningstar)

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. tutors commented on Sep 20

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]

  2. blazing trader reviews commented on Sep 23

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]

  3. bitcoin evolution commented on Sep 30

    … [Trackback]

    […] Find More on that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]

  4. bitcoin era commented on Oct 01

    … [Trackback]

    […] Here you will find 28861 additional Information on that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]

  5. Sig Sauer Firearms for Sale commented on Oct 14

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]

  6. rbc sign in online banking commented on Nov 14

    … [Trackback]

    […] There you will find 52120 additional Info to that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]

  7. used ram 1500 winnipeg commented on Nov 24

    … [Trackback]

    […] Here you can find 59581 additional Info on that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]

  8. bank national commented on Jan 18

    … [Trackback]

    […] Read More on on that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]

  9. CI CD Company commented on Feb 07

    … [Trackback]

    […] Read More here to that Topic: thereformedbroker.com/2016/02/18/are-gigantic-money-managers-a-systemic-risk/ […]