Wealth funds are getting ‘too big to fail’

Andy Haldane, in charge of financial stability at the Bank of England, is concerned about the scale and growth of wealth funds. Picture: Neil Hanna
Andy Haldane, in charge of financial stability at the Bank of England, is concerned about the scale and growth of wealth funds. Picture: Neil Hanna
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The world’s $87 trillion (£52.4tn) asset management industry poses some of the same “too big to fail” risks associated with the banks during the financial crisis, the Bank of England’s chief watchdog has warned.

Director of financial stability Andy Haldane told delegates at the London Business School’s asset management conference yesterday that the sector’s funds could rise to $400tn by 2050 as populations expand and get older and richer.

In Britain, the sector now handles assets worth more than three times the national economic output. In 1980 the figure was less than 50 per cent of gross national product (GDP).

Haldane said recent trends have seen funds moving into illiquid assets and index-linked, passively managed funds, and away from the traditional actively managed funds in blue chips and government bonds.

“These trends potentially have implications for financial markets dynamics and systemic risk – for example, greater illiquidity risk, correlated price movements and susceptibility to runs,” he said.

He admitted risks from asset managers are different from banks because the former do not provide credit and bear that risk in their portfolios, but he added: “Their size means that distress at an asset manager could aggravate frictions in financial markets, for example through forced asset fire-sales.”

Even if the “fail” element in “too big to fail” is a red herring, the “big” is not, he added.

The sector has the potential to amplify pro-cyclical swings in the financial system and wider economy, giving a false picture of the price of risk.

Such behaviour could crimp the industry’s potential to provide long-term financing to the economy in the form of equity and long-term debt, Haldane said.

“A world without equity is likely to be one with poorer risk-sharing and weaker long-term investment,” he added.

Haldane noted there has already been a steady erosion of the industry’s direct holdings of British shares, with asset managers de-risking as global equity prices fell sharply during the financial crisis, a time when they could be playing a stabilising role.

Such behaviour is likely to worsen returns to investors and amplify cycles in the financial system and economy, he said.

The sector is already lobbying intensively against draft plans by the Financial Stability Board (FSB), the regulatory arm of the Group of 20 economies (G20), to designate funds over $100 billion as systemically important and therefore subject to as-yet undetermined extra supervisory requirements.

Helen Roberts, policy lead for investments at the National Association of Pension Funds, said: “It is true to say that UK pension funds have been de-risking aggressively in recent years but a substantial amount of the flow into fixed income has been into corporate bonds, with the average private defined benefit scheme holding around 14 per cent in these bonds.

“Pension funds are also increasingly looking to embrace illiquidity premium to enhance the yield on their portfolios. “There is growing interest in investing in long term investments such as infrastructure and social housing.”