“The sector remains highly concentrated, with the top 20 managers accounting for 40% of total assets… As risk-taking migrates away from the banking sector, asset managers have played a pivotal role together with their customers and these customers’ investment consultants.”
For the BIS, the question becomes, whether or not asset managers have the capacity to take temporary losses in their stride, especially as retail investors have risen to prominence.
“Retail investors have smaller balance sheets, shorter investment horizons and lower risk tolerance, and hence a smaller loss-absorbing capacity,” it wrote.
This has become especially concerning as banks have stepped away from their market making role, leading to further falls in market liquidity.
For David Pope, managing director of quantamental research at S&P Capital IQ, the regulators’ objective was to shift risk away from the banking sector, which they have succeeded in doing. But, he argues, underlying liquidity is worse than people are highlighting as we are seeing liquidity issues in what’s by and large a normal market.
“As an equity guy, one thing I am concerned about is that if investors in less liquid fixed income products are hit with margin calls, they could fund that by selling more liquid assets, which could hit the equity market.
In recent months, markets have been fairly buoyant; indeed, the argument goes, while it is lower than it was in the pre-crisis golden age, it is nowhere close to where it was during the depths of the crisis. But, that makes sense given that markets are currently pretty positive. If the market is surprised, however, if it does fail to take a rate hike in its stride, things could change very quickly.
And, if that were to happen, one hopes that those making the decisions as to what to buy and sell, are able to be patient.
