The Investment Company Institute (ICI) has issued a damning rebuttal to an International Monetary Fund (IMF) report into fund management’s impact on financial market stability.

Chris Plantier, senior economist at the ICI, argued that the IMF’s Global Financial Stability Report contained a “wide range of data errors, inconsistencies, results that don’t bear statistical scrutiny, and misinterpretations”.

“The [report] confuses correlation with causation, reports weak econometric findings as if they were statistically significant, and uses strained economic assumptions to skew its results toward supporting its conclusions.” —Chris Plantier, ICIIn particular, Plantier said the report’s assertion that mutual funds can pose stability risks “doesn’t hold up to scrutiny”.

“The [report] confuses correlation with causation, reports weak econometric findings as if they were statistically significant, and uses strained economic assumptions to skew its results toward supporting its conclusions,” Plantier wrote in a blog post on the ICI’s website.

The IMF report, published in April, presented evidence that flows into and out of mutual funds could affect asset prices and returns in “smaller, less liquid markets” such as emerging markets, US high yield, and municipal bond markets.

However, the ICI—which represents US-based funds and providers—said the IMF was wrong to make a connection between the two. Plantier argued that the report’s use of weekly, rather than daily, data meant the analysis was flawed—particularly has the ICI’s own analysis of similar data had given the opposite conclusion.

“Consider what scientists call the ‘rooster syndrome’,” Plantier wrote. “The rooster crows; the sun comes up; but no one should assume that the crowing rooster caused the sunrise.”

Plantier said the literature upon which the IMF’s assertions were based is “quite mixed” on how much influence individual funds have on their markets.

“A number of studies, for instance, have concluded that the evidence does not support the IMF’s conclusion,” Plantier wrote. “We aren’t convinced that the IMF’s empirical results have shifted the weight of that evidence.”

The IMF’s report called for an overhaul of asset management regulation in response to what it saw as increasing liquidity and concentration risks, primarily based on the data and analysis Plantier disputed.

“Easy redemption options and the presence of a ‘first-mover’ advantage can create risks of a run [on a fund],” the IMF stated, “and the resulting price dynamics can spread to other parts of the financial system through funding markets and balance sheet and collateral channels.”

Plantier co-authored a paper last year analysing the behaviour of bond funds during the “taper tantrum”, a period of volatility in fixed income markets caused by the Federal Reserve’s gradual withdrawal of quantitative easing. The research found “little evidence of destabilising feedback”.

The ICI’s responses to the IMF report are the latest in an ongoing debate on the wider importance of asset managers to the global financial system. The Financial Stability Board and the International Organisation of Securities Commissions have invited feedback on a consultation about the systemic importance of asset managers, investment funds, and other financial entities outside of banking and insurance.

Further reading:The ICI’s responses to the IMF’s report & The IMF’s Global Financial Stability Report

Related:IMF Calls for Fund Manager Stress Tests & Why Pension De-Risking Could Threaten Financial Stability