The Woodford debacle is a wakeup call for the markets about illiquidity

International Monetary Fund analyst Laura Kodres warns that investors are putting too much faith in mutual funds. According to Deutsche Bank, half of the high-yield asset funds could experience liquidity shortfalls in a market panic.

Kodres’ notes that a lot of these funds own assets that could be very hard to move in the event of a market downturn.

“There is a sense in which retail investors should have some opportunity to take risks that were previously just the purview of high-net-worth individuals,” Kodres told MarketWatch this week. “To be fair, probably somewhere in the fund documents it says there is liquidity risk and redemptions are not guaranteed within 24 hours. But I’m not sure everyone has read that fine print as closely they should.”

International Monetary Fund Has Concerns

Kodres statement comes a day after Deutsche Bank released a report on the state of the mutual fund industry. The German bank’s chief economist Torsten Sløk released damning data on the state of these funds. “Half of funds with high-yield assets would face liquidity shortfalls if managers experience a repeat of the worst redemption shocks felt between 2000 to 2019,” Marketwatch writes.

The report indicates that 15% of fixed-income funds would experience similar liquidity challenges under the same stress test.

“Holders may not realize their requests are straining the fund’s abilities to liquidate assets, especially if a lot of holders want to redeem simultaneously,” Kodres said.

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