One of the biggest conversations within the fund management community at the moment is the subject of liquidity and the importance of it to individuals rather that institutional investors. To individual investors, it can be vital and is one of the major factors we look at before investing into anything. If you are looking at investing in anything, liquidity should be one of your primary concerns. In normal terms, liquidity is how quickly a fund manager can sell your portion off, providing you with cash. In the worst case scenario, if there is no secondary market (someone to buy your percentage) you will not be sent your money straight away, and it may take some time for it to happen.
All mutual funds should have a proportion of moneys kept in cash to allow for a certain amount of surrenders to happen within a normal trading environment. Nearly all funds in most sectors are able to liquidate up to twenty-percent of their assets in less than a day. One area that SCM Direct found some “mismatch” was with UK Smaller Company Funds where they found that it will take an average of up to five days to free up to twenty percent of their assets. Even though most of these are claimed to be on a daily traded basis, it is clear that in reality, they are not able to do redemptions in the same time scale.
This is not just UK smaller company class funds. If there is no secondary market and the fund gets redemption requests totalling up to fifty percent, the natural thing to do is to suspend trading in the fund and no one will get paid out.
There are many reasons why a fund may have a redemption issue. Not just because they are an Allan Stanford fraud but most likely, smaller funds may have only a few large institutional investors. If these institutional investors (central banks, pensions, banks and insurance companies) realign their portfolios and drop the fund you are in, it will not just alter the price of your investment, but also, the ease to switch or sell out of it in the future.
When you are buying into a fund such as a mutual or superannuation fund, or any other type of security don’t just look at the returns that it has been making. The secondary market can be just as important. It really doesn’t matter how much your investment is worth, if you can’t realise that money when you need it. Ask for a breakdown of institutional versus private investor’s holdings and a level of redemption payouts with their average time if you are looking at funds. If you are looking at a smaller on off boutique investment, be aware if it isn’t going that well, you may be well down the pecking order for getting your cash. Make sure anything that you do, fits well within your strategy and your risk profile.
Paul McLardie is a partner at Total Wealth Management. Contact him at Paul.firstname.lastname@example.org