In the wake of the news headlines regarding the suspension of Neil Woodford’s UK Equity Income fund, we clarify our stance on liquidity (the ease of converting an asset to cash). Where it is usually very easy to convert a FTSE 100 company shares to cash, such shares are known as “liquid”. On the other hand, where it’s much harder to convert say a classic car or fine art collection to cash, such assets are known as “illiquid”.
The core value of liquidity
Liquidity means our investors can sell shares in our funds when they want to, at the current market prices, and get their money back within three days, in all market conditions.
To ensure liquidity across Courtiers funds we follow a set of guidelines:
- Prior to making an investment we assess liquidity, by looking at historic trading volumes, market capitalisation, other large shareholders and market listing, and consider the size of our potential position.
- We assess and monitor the financial strength of our trading counterparties.
- An independent committee monitors the liquidity of all the positions we invest in.
So what’s happened?
The downfall of Neil Woodford and the funds he manages for investors has reached the front page of the tabloids. BBC News and every major UK newspaper are featuring the suspension of his flagship fund. This was an accident waiting to happen. But it was predictable. Investing in unlisted, illiquid stocks is fine until you want to sell. If money keeps flowing into your fund you may never have to sell. But when investors want their money out, you have to sell something to release that money. Neil Woodford had to sell his most liquid holdings, the household names. With every sale, his funds become more concentrated in unlisted investments, pushing on regulatory limits. His fund is suspended, meaning that investors cannot get their money out. Investor liquidity is gone.
We have never invested in Woodford Investment Management funds. We analysed Neil Woodford’s funds at Invesco when he announced his departure in late 2013. Our concerns at the time were all down to liquidity. More than 22% of each of his funds comprised “non index” companies with a huge bias to small companies. Although at the time the Invesco Chief Investment Officer confirmed only “around 4% was in unquoted stocks” there was considerably more held in AIM listed, very small companies with limited liquidity. Neil Woodford is managing portfolios of small, sometimes unlisted, UK companies. For the last three years he has had an increasingly difficult time and this has come to a head. His investors, the ones who have kept faith for so long, are the losers.
We work hard to ensure all our investors have access to their money at all times. This means that we will not be investing significant sums in unlisted companies and we will not be a substantial shareholder in a company if to do so threatens the liquidity of our funds. Our clients have well diversified portfolios. If we ever want to consider an investment that is less liquid, we invest only a fraction of our fund. We know that our investors value liquidity. We have managed our funds through the Global Financial Crisis and had no liquidity issues throughout that period, or since. Neil Woodford forgot that the money he manages belongs to people who might want it back quickly. Funds like his, advertising daily liquidity, are not the place for illiquid assets.