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ICI Rebuts IMF Data on Asset Management Threat to Financial Stability

The ICI released a series of articles noting issues with a chapter in the IMF’s Global Financial Stability Report containing an analysis of the asset management industry and its effect on financial stability. The ICI argues that “the IMF’s inexperience with regulated funds has led to data errors, inconsistencies, results that don’t bear statistical scrutiny, and misleading claims—all of which seriously undermine the report’s validity as a foundation for policy changes that could end up harming funds, their managers, and their investors.”

The first post in the series challenges the IMF’s data on emerging market debt and registered funds’ investments therein. It also argues that regulated funds are a stable source of investment and that fund flows into emerging markets are responsive to returns instead of the cause of the source of the returns. In a follow-up post, the ICI complains that the IMF had “quietly revised its estimate of emerging market bonds held by bond funds in 2014 from $2.93 trillion to $1.14 trillion—a whopping 61 percent reduction.” Despite the data revision, the IMF’s report maintained its conclusions regarding the effect of bond funds on emerging markets.

The ICI also argues that the inconsistency was not an isolated error, giving the example of the IMF’s analysis of fund redemption fees. In its report, the IMF provided data showing that redemption fees had fallen from over 2.5 percent to around 1 percent between December 2001 and August 2014. However, the ICI argues that since 1979 the SEC has taken the position that redemption fees may not exceed 2 percent, and thus the redemption fees cannot have averaged more than that amount. The ICI posits that the discrepancy is caused by the IMF’s unfamiliarity with the data that led to the inclusion of contingent deferred sales charges (which were more common in the early 2000s) along with redemption fees.

Lastly, the ICI takes issue with the IMF’s conclusions regarding what it sees as the increasing propensity for investor herding, which the ICI calls a loaded term that “conjures up images of cattle or lemmings all moving together mindlessly.” The ICI highlights that the authors of the paper detailing the measure for herding utilized by the IMF noted that herding could actually have a stabilizing effect by countering irrational moves by individual investors or could essentially make for more efficient markets by speeding price adjustments.

In its report, the IMF presented data from 2006 to 2014 that purported to show that herding was trending upwards. However, the ICI argues that this presentation conflicts with herding data that the IMF presented for the time period of 1997 to 2013 in last year’s version of the report. The ICI notes that, in some instances, figures in the most recent version more than doubled. Though the charts in the IMF reports show that the IMF changed the source of data for the analysis, it did not give any reason for the change. Additionally, looking at the wider time period presented in last year’s report, the upward trend dissipates and the ICI in fact argues that there is no trend at all.

The IMF report also included data purporting to show that retail investors are more likely to herd than institutional investors. But again, the ICI charges that the IMF is misreading the data. The ICI notes that “the vast majority of the assets in institutional share classes are held by retail investors” and that many IRAs and 401(k)s are often pooled in an omnibus account and invested in institutional share classes.