Bank support shows mutual fund coronavirus vulnerability

Central bank support for mutual funds demonstrates the systemic risk that these strategies represent to financial markets, Fitch Ratings warned.

More than $90 billion in support for mutual funds amid the COVID-19 pandemic has been provided by central banks worldwide, the ratings agency said in a non-rating action commentary published Monday.

The scale of this support shows the sensitivity of regulators to the potential risks these funds pose to the financial sector, the commentary said.

Mutual funds represented $55 trillion, or 64% of global GDP, at the end of 2019, up from $24 trillion or 38% of GDP at the end of 2008, according to ICI Global.

Fitch warned that stress within mutual funds could lead to increased volatility in regions or countries where central bank facilities are less widespread, comprehensive or where their effectiveness is constrained. "The magnitude of support brought to bear also suggests that the liquidity management tools available to funds may be inadequate for a severe stress scenario," Fitch said.

India last month became the latest country to implement a support facility for mutual funds, with $6.6 billion of 90-day repo funding made available to banks to allow them to provide liquidity to funds. Earlier in April, six strategies with a combined $4.1 billion in assets under management were gated.

The largest support so far released is the U.S. Money Market Mutual Fund Liquidity Facility, launched in March. As of April 14, the program had $51 billion of outstanding loans, Fitch said. Thailand and Columbia have also implemented or expanded central bank repo facilities.

Countries where support facilities have been put in place have not experienced additional redemption suspensions, Fitch said. Europe — where such support has not been implemented — saw more than 80 mutual fund strategies with more than $40 billion in assets implement "extraordinary liquidity management measures in March." "Nevertheless," the commentary said, "liquidity in European funds has improved following broader market support initiatives and several funds have reopened."

A separate report by Fitch warned that money managers face a medium impact on their businesses from the coronavirus.

The agency assessed the rating vulnerabilities of global financial institutions in a downside scenario, scoring parts of the industry to show their potential sensitivity to such an outcome. 

Traditional money managers “would experience fee pressure from market sell-offs and increased outflows as investors move to safer assets,” the report said. “Cash flow leverage ratios may increase as a result.”

Managers with high leverage would be more acutely impacted, while alternatives money managers “may experience additional valuation hits on fund holdings.”