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Fabio Cortes and Luca Sanfilippo
Emerging economies in the post-crisis period increasingly saw portfolio debt inflows from a type of large international investment fund: Multi-Sector Bond Funds (MSBFs). These investors have lacked adequate representation in the literature. This paper constructs a new detailed database from micro-level MSBF emerging market (EM) holdings from 2009:Q4–2018:Q2. Exploiting this data, the paper assesses the risks they pose to the financial stability of specific emerging bond markets. The data shows that MSBFs are highly concentrated–both in their positions and their decision-making. The empirical results further suggest that MSBFs exhibit opportunistic behavior (and more so than other investment funds). In periods of high risk aversion, large MSBF portfolio reallocations out of EMs can be associated with underperformance of the same markets, signaling the importance of monitoring their footprint and better understanding their asset allocation decisions.
International Monetary Fund
The IMF Executive Board has been considering reforms to strengthen the Fund’s mandate to better equip the institution to safeguard global stability. Executive Directors have supported a range of reforms to modernize the Fund’s surveillance mandate and modalities. This paper focuses on selected aspects of these reforms where further work was called for, including on a possible multilateral surveillance decision and proposals to enhance the traction and flexibility of bilateral surveillance.
Ms. Anna Ilyina
The objectives of this paper are: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a "volatility shock" in one of the asset markets, under sufficiently realistic assumptions about the fund manager's performance criteria and investment restrictions; and (2) to analyze the sensitivity of the equilibrium price of an asset to shocks originating in other fundamentally unrelated asset markets for a given mix of common investors. The analysis confirms that certain combinations of investment restrictions (notably short-sale constraints and benchmark-based performance criteria) can create additional transmission mechanisms for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and on-going changes in the investor base for emerging market securities for the asset price volatility.
Fabio Cortes and Luca Sanfilippo

asset managers responding in turn, do not act as “deep-pocket” investors (buying assets at fire-sale/discount prices when less informed investors run for the exits). Both investors and managers respond to country returns and crises and adjust their investments substantially, generating large reallocations. As a result, investment fund EM assets fluctuate greatly and pro-cyclically over time–retreat in bad times and increase it in good times. Put differently, capital flows from investment funds seem to amplify cycles and expose countries in their portfolios to foreign

International Monetary Fund. Monetary and Capital Markets Department

have improved their debt management capability. These factors have led to a sustained and significant upgrading of the EM sovereign debt class, about half of which is now investment grade. The low yields in MM assets coupled with improved quality and performance of EM assets have led to a significant increase of MM investor interest in EM assets. As discussed in earlier issues of the GFSR, relatively small changes in the asset allocation of large global investors can significantly affect EM funding costs. Several EMs have proactively taken advantage of this benign