Woodford-style run on funds ‘poses threat’

IMF warns of a ‘liquidity mismatch’ situation that could overwhelm the global financial system

‘Pressures from investor runs could force funds to sell assets quickly, which would further depress valuations’

NERVOUS investors who dump investment fund assets in a panic threaten to overwhelm a $41trillion (£35.8trillion) industry and push the global financial system towards collapse, the International Monetary Fund has warned. The IMF said open-ended investment funds, which promise consumers’ cash on demand, but often invest in assets like corporate bonds or property that are hard to sell quickly, had grown fourfold in value since the financial crisis.

But they also often created a so-called “liquidity mismatch” that risked overwhelming funds if lots of investors suddenly withdrew their cash in a panic.

Fabio Natalucci, a deputy director at the IMF, said: “Pressures from these investor runs could force funds to sell assets quickly, which would further depress valuations. That in turn would amplify the impact of the initial shock and potentially undermine the stability of the financial system.”

Investor runs helped to sink former star stock-picker Neil Woodford’s flagship fund in 2019. Mr Woodford had built large positions in hard-to-trade shares. But when concerns about the fund’s performance became more widespread, it collapsed under the demand of withdrawals.

Mutual funds, which pool together trillions of dollars of investor cash, contain a wide variety of assets that are linked to the broader financial system.

During the pandemic in March 2020, the funds pushed financial markets towards meltdown as investors dumped their holdings and demanded their money back.

The IMF said the collapse of these funds could impact the wider economy. Mr Natalucci said: “These funds hold corporate bonds, they hold loans, bank loans, sometimes they can hold mortgages, and that’s another way to finance the real economy.

“So to the extent that these funds do not continue to [do that] would have implications for the real economy because there will be less credit going to households and businesses.”

The IMF also warned that it was not the job of central banks to step in to support mutual funds, as they had done during the pandemic and financial crisis.

Mr Natalucci added: “This is essentially the second time in 10 years or so of central banks having to step in to backstop the financial system. We need to address this vulnerability so that we don’t have this recurring episode where this vulnerability gets essentially unmasked by a shock.”

Janet Yellen, the US treasury secretary, has warned that more needs to be done to fix the financial plumbing so that volatile market movements do not threaten financial stability.

The IMF urged more action to discourage investors from trying to get their money back before others.