A new study from Strategic Insight asserts that “mutual funds and their management companies have displayed remarkable stability during each period of heightened market volatility over the past three decades.” The study found that “capital preservation-driven withdrawals” were, in general, limited to less than two percent of fund assets and short in duration, even during the most volatile periods. Additionally, by using cash reserves as a buffer, stock fund portfolio managers were able to lessen the impact of redemptions during times of crisis. For example, in October 2008, portfolio managers sold only 0.4 percent of assets in funds, an amount that represented less than a third of investor net redemptions during the same period.
The study found similar results in fixed income funds. One example of heavy redemptions in bond funds could be found in the PIMCO Total Return Fund in the months following the departure of Bill Gross. The study noted that, in September 2014, the fund experienced outflows of 11 percent, most of which occurred in the final few days of the month. The next three months saw net redemptions of 14 percent, 5 percent, and 12 percent, respectively. However, the study noted that the investment performance of the fund during this period was roughly on par with its peers. In sum, “[t]he nearly $80 billion of net liquidations out of this fund during the September to December 2014 period, representing over one-third of this flagship fund’s assets, did not result in price dislocation for the fund or for the bond market.”
The study concluded that “FSOC speculation on massive, harmonized ‘run on the fund’ may be based on a banking framework that has no application to the mutual fund marketplace.” Funds are “inherently stable” due to the long investment horizon of most mutual funds and the heterogeneity of their investors, the study argued. Further, the study suggested that, if none of manager’s funds are a source of systemic risk, then neither is the manager and thus it should not be considered systemically important.
A press release detailing the findings can be accessed here.