However, Hutchinson said it is ‘valid to consider the potential for a Japan-esque future’ where equities fail to make sustained progress for years and credit is the most rewarding asset class.
“People have been worried about mass redemptions from bond funds for a long time, in part because they probably expected a normal cyclical economic recovery, accompanied by an increase in interest rates,” Hutchinson said. “This has clearly not transpired and with economic data indifferent and equity markets in a nervous, bearish mode, it is difficult to see why investors would wish to abandon bonds in their droves. Even after the horrors of 2008, only a small proportion of global mutual funds were actually liquidated,” she added.
Hutchinson said that countering this is the argument that retail participation through bond funds and multi-asset funds is greater than it was at that time, due to low interest rates. How some of these investors would respond to a sustained period of negative total returns is an open question, she noted.
“There is no silver bullet answer to the bond liquidity problem. We all know that daily-dealing, open-ended funds are an imperfect vehicle for any asset class that experiences liquidity problems but for the majority of the time, they are a satisfactory way for retail investors to invest in an otherwise inaccessible market.”
