Liquidity and the retail investor
Marcus Brooks explains why, when selecting an investment solution, regulatory structure and controls are important.
It is impossible to pick up the money section of a newspaper without seeing some comment on Neil Woodford and the issue of the illiquidity of his funds.
We were disappointed to read some articles that appeared to suggest that the UCITS (The Undertakings for the Collective Investment in Transferable Securities to give it its full name) structure has somehow caused the problem. By their nature open ended funds can be required to liquidate assets quickly and there is a strong argument that illiquid investments should not be held in those structures. However, the rules do permit a small percentage to be held.
The SVS Cornelian Fund range, which is used widely by our clients, comprises all UCITS funds. The UCITS ‘badge’ is one of the most highly regarded and trusted in the world. It has gained that trust as a result of a framework of rules and regulations that ensure controls around many aspects of funds such as concentration of holdings, types of assets that can be held, percentages that can be held in single assets and minimum requirements on liquidity of the underlying assets. Neil Woodford chose to invest in unquoted securities, for which there was no ready market, which is permitted in a limited way under the rules. This, combined with heavy redemptions by investors following poor performance, served to drive up the percentage in unquoted investments (as he sold out of quoted investments to meet redemptions).
As investors we value liquidity of our portfolios – the ability to buy or sell out of positions – because we wish to be able to adjust portfolios at any point in the light of our outlook for the individual holdings, the global economy and the prospects for markets. Our ability to deal in the holdings we use in portfolios (both in our SVS Cornelian Funds and in Discretionary portfolios) is a key part of the initial evaluation process when making the decision to invest, and it is something that we monitor on an ongoing basis. As I write, our statistics indicate that we could liquidate 90.5 % of our portfolios in one day and 96.1% in a week under normal market conditions.
Having said this, we often wish to take advantage of opportunities in underlying assets which are themselves illiquid, such as commercial property, infrastructure, private or illiquid debt or private equity. Thankfully, investment trusts which are closed ended structures (as opposed to UCITS funds which are open ended) offer an appropriate investment vehicle because there are a finite number of shares quoted on a stock market that can be traded according to supply and demand for the shares. Thus, the underlying fund manager’s ability to hold an asset, buildings for example, is not affected by trading in the fund’s shares and we hold a number of investment trusts in portfolios. The corollary of the finite number of shares, and trading according to supply and demand for them, is that the shares may trade at a price that is different from the value of the underlying asset. This can have its advantages in that it can offer the opportunity to buy assets at a
discount to true value and this is certainly something that we have taken advantage of at times in the past. However, discounts or premia to asset value can
fluctuate significantly which can make share prices more volatile than performance of the underlying assets and indeed of open ended funds.
In conclusion, liquidity is something that we research closely for our investors to ensure that they do not find themselves in a ‘Woodford’ situation while investing in a Cornelian portfolio, while we are perfectly able to access illiquid assets through suitable vehicles which offer liquidity.