Record amounts of money have been pulled from the world’s investment funds in the current market turmoil, putting global asset managers in the eye of the storm and challenging an industry struggling to navigate the end of a record-breaking bull run.
Mutual funds and exchange traded funds that invest in bonds suffered $109bn in outflows for the week ending Wednesday, a new record that also included the highest-ever weekly outflows for specialist junk bond and investment-grade corporate bond funds. Equity funds shed $20bn, the second-highest sum this year, on top of the record outflow of $23bn in the first week of March, according to the data from EPFR Global.
While investors often ditch riskier assets in moments of turbulence, such as equities and junk bonds, the exodus even from investment-grade corporate debt and sovereign bond funds underscores the extent of a rush toward cash that has been blamed for some of the biggest market moves of recent days.
Money market funds, which invest largely in short-term government debt and are used by investors as a proxy for cash, soaked up $95bn of inflows in the past week, extending last week’s record $136bn haul, EPFR said.
The sell-off is “fear-inducing for investors”, said Liz Young, director of market strategy for BNY Mellon Investment Management. “People don’t want to own anything except cash and that means selling across the board.”
The outflows help to explain the rapid intervention from central banks and governments, which has included interest rate cuts, asset purchasing programmes, emergency lending facilities and fiscal stimulus to counter the pandemic’s financial and economic toll.
They also point to the different character of the recent tumult, compared to the onset of the financial crisis of 2007-09.
Oliver Harvey, a macro strategist at Deutsche Bank, points out that banks were the locus of the last crisis but are now in much better shape. “The heart of this crisis likely lies in the investment community,” he said in a note to clients last week.
Fund managers always carry some cash as a buffer to deal with potential redemptions, but the worry is that outflows will force many to dump more of their holdings and add to the sell-off in the coming weeks. Many traders have already pointed to redemptions and deleveraging by hedge funds operating in the US Treasury market as one reason for dislocations in trading there.
Redemptions pose a test for many investment groups, given how the very low yields of recent years have pushed money into riskier funds and tempted funds to make riskier investments. The IMF highlighted this danger in its latest report on global financial stability late last year.
“This increased risk-taking may lead to a further build-up of vulnerabilities among investment funds, pension funds and life insurers,” the IMF said. “Low yields promote greater portfolio similarities among investment funds, which may amplify market sell-offs if there is an adverse shock.”
Market liquidity — the ease with which investors can trade without impacting prices — has atrophied across financial markets in recent weeks, according to analysts. That is particularly noticeable in bond markets, which typically trade less frequently than equities, according to David Bieber, a Citi strategist.
“Markets remain fragile and any trigger — either caused by a market event or changing investor sentiment — can create large gyrations in price action,” Mr Bieber warned in a report on Thursday. “These price corrections could be amplified by the liquidity conditions.”
The selling adds pressure on the asset managers themselves, whose fees diminish when the value of their funds falls and whose growth prospects will be dim until investors return to the market. The S&P 500 asset management index is down 35 per cent since the US stock market peaked in February, outpacing the broader market decline.