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SIFMA AMG Survey Shows Separate Accounts Do Not Pose Systemic Risk
Survey data from 9 asset managers, with combined $4 trillion in separate account assets shows:
99% invested in long-only investment strategies;
Less than 4% employed leverage, less than 2% held illiquid securities;
Separate accounts are subject to multiple layers of regulation

New York, NY, April 11, 2014– A SIFMA Asset Management Group (SIFMA AMG) survey of nine asset managers, with an aggregate AUM of $11.2 trillion, demonstrates that separate accounts do not pose systemic risk.  SIFMA AMG conducted this survey to provide data on the assets and investment strategies of separate accounts managed by asset managers, and to clarify important misconceptions.

SIFMA AMG’s survey of the Asset Managers’ collective $3.98 trillion in separate account assets demonstrates that separate accounts do not typically engage in strategies that pose risk to financial stability.  Separate accounts are owned by individual clients, such as pension funds and insurers, and are subject to both asset management regulation and laws governing the activities of an individual client. The survey found that in separate accounts with greater than $75 million in AUM:

• 99% invested in long-only strategies, with 53% invested in passively managed, diversified index strategies.
• Less than 4% employed large SMAs surveyed employ leverage and the average leverage reported for these accounts is modest.
• Less than 2% of the large SMAs surveyed held illiquid securities and less than 2% engage in securities lending.
• 100% of respondents robustly monitor counterparty risk and employ comprehensive risk management procedures.

“The goal of survey is to provide policy makers with insight into separate accounts.  The survey underscores our belief that separately managed accounts do not pose a specific or unique threat to financial stability,” said Tim Cameron, managing director and head of SIFMA’s Asset Management Group, “SIFMA AMG strongly encourages regulators to consider the unique characteristics of the asset management industry as they work to manage systemic risk.”

Large institutional investors often prefer separate accounts for several reasons, including: the ability to negotiate fees, tailor the investment guidelines, and the ability to own the assets outright rather than owning a partial interest in the assets of a fund.  In every case, asset managers are fiduciaries to the clients’ assets they manage, and monitor for risks such as duration, volatility, liquidity, concentration risk and convexity.  Additionally, it’s important to note that separate accounts are typically held by sophisticated investors who understand risk exposures and apply their own risk management processes to supplement the work done by asset managers.  The SIFMA AMG survey found:

• Approximately 35% and 15% of large accounts surveyed are owned by pension funds and insurance companies, respectively, and therefore are subject to additional regulations and standards of care.
• Approximately 40% are owned by official institutions, foundations and endowments, or are sub-advisory mandates.
• Approximately 10% are subject to other types of regulatory oversight.

The survey asked asset managers to answer a number of questions about SMAs that they manage including investment strategy, use of leverage, investment in illiquid assets, use of securities lending, the regulatory status of the underlying clients, and risk management processes. In total, nine managers with a combined firm total AUM of $11.2 trillion and a combined total AUM in SMAs of $3.98 trillion voluntarily participated in this survey. The majority of questions in the survey focused on large SMAs with at least $75 million in assets.

The SIFMA AMG survey was conducted in response to policymakers’ contention that more information regarding the activities of separate accounts is necessary. For example, the Office of Financial Research Study on Asset Management and Financial Stability specifically cited data gaps related to separate accounts and their leverage practices and risk exposures; a consultative document published by the FSB and IOSCO on G-SIFI designation referenced separate accounts as an area for further research; and recent testimony from OFR director Richard Berner suggested risk-taking in SMAs could give rise to threats to financial stability.

The full survey results are available here: http://www.sifma.org/issues/item.aspx?id=8589948419 .

SIFMA’s comment letter to FSB and IOSCO on assessing systemic risk posed by investment funds is available here: http://www.sifma.org/newsroom/2014/sifma_amg_comments_on_assessment_methodologies_for_identifying_nbni_g-sifis_and_provides_data_on_separate_accounts/ .

SIFMA’s comment letter on the OFR Study is available here: http://www.sifma.org/newsroom/2013/sifma-amg-and-iaa-express-concerns-with-ofr-study-on-asset-managers-seek-withdrawal-of-the-study/.