The growing importance of investment funds in capital flows
Richard Schmidt and Pınar Yeşin
Abstract
In this paper, we first document the growing importance of foreign-domiciled investment funds in countries’ portfolio liabilities over time and then show empirical evidence that cross-border fund flows are coincident with asset price movements. To measure the external liabilities of countries to foreign-domiciled funds, we complement conventional balance-of-payments and international investment position data with granular and real-time data on fund flows. We find that the external exposure of countries to investment funds has been steadily increasing both for advanced and emerging market economies. Furthermore, we find that this increased external exposure is coincident with higher exchange rate fluctuations, lower bond yields and higher stock returns. Because sustainability-themed investment funds are growing faster than conventional investment funds, we also focus on Environmental, Social and Governance (ESG) funds and construct an index of sustainable finance that can distinguish between its domestic and cross- border components. Our index reveals that ESG funds domiciled in European countries tend to invest predominantly in domestic markets, whereas ESG investment in emerging market economies to a large extent originates from foreign-domiciled investment funds.
Open-ended bond funds: Systemic risks and policy implications
Stijn Claessens and Ulf Lewrick
Abstract
Alongside other non-bank financial intermediaries, open-ended funds that invest in bonds ("bond OEFs") have grown rapidly over the past two decades. Besides their size, their business model and role in recent events suggest that bond OEFs can amplify stress in financial markets. The March 2020 market turmoil tested the effectiveness of bond OEFs’ tools in dealing with large investor redemptions in the presence of liquidity mismatches. Their tools notwithstanding, bond OEFs had to liquidate assets on an elevated scale, thus collectively adding to bond market pressures. Without central bank interventions, broader fire sale dynamics could have been triggered. Regulation that takes a macroprudential perspective of the sector could support financial stability by ensuring that tools internalize the effect of spillovers arising from bond OEFs’ actions.