As we go head-first into a new decade, it’s natural to reflect on what’s gone before and look forward to what the next ten years may hold. At the start of the last decade, the world’s financial system was frozen by a lack of liquidity. Fast-forward to 2019, and once again, the liquidity iceberg struck, bringing an end to Neil Woodford’s fund management venture and catching out the £2.5bn M&G Property Portfolio fund, which was forced to ban withdrawals. So, is liquidity something we need to watch out for as 2020 dawns?
Thankfully, liquidity is not something that Citywide Financial Partners clients need to have sleepless nights over. At Citywide, we think long and hard about whether the funds our clients invest in can be quickly converted back into cash – or to put it another way, if they are ‘liquid assets’. In everything we do, our primary focus is being able to pay back our client’s investments any time, any day, no matter what’s happening in the financial markets.
A not-so-shrewd investment
If we look at where it’s all gone wrong for others in the past, you’ll get some idea why Citywide place so much importance on the liquidity of our client’s assets.
Let’s look at one-time investment-guru, Neil Woodford. In 2015, the BBC declared he was “the man who can’t stop making money”, yet only two years later it all started to change. A series of bad decisions led to a drop in the value of his flagship Woodford Equity Fund and investors got jittery – in fact, they began pulling out their money so quickly, he couldn’t sell assets quickly enough to satisfy their demand. Then in June 2019, the administrators had to ‘gate’ the funds, preventing investors from withdrawing any more money. Part of the problem it seems is Woodford’s over-reliance on buying unlisted stocks, which it then struggled to sell when the going got tough.
Also in 2019, the liquidity nightmare became a reality for the M&G Property Portfolio fund. Investors should know that property is not a liquid asset, but the M&G fund was ‘open-ended’ meaning investors could get their money back almost immediately. However, trading had to be suspended for the second time in three years when the fund was faced with an “unusually high and sustained” period of withdrawals – an estimated £900m in under a year. The asset manager of M&G stated that “Political uncertainty and ongoing structural shifts in the UK retail sector had made it difficult to sell commercial property and therefore meet the requested redemptions.” So many of its investors have no idea when, or if, they’ll be able to get their hands back on their money.
Keeping your money safe
When we talk about Citywide’s approach to liquidity, we often quote Neil Blumenthal, co-founder and co-CEO of the transformative lifestyle brand, Warby Parker. His advice to fund managers is this: “It may seem premature, but you need to be thinking of your exit from the moment you accept capital, because at that moment, you’ve made an explicit agreement with an investor that he or she will eventually be able to gain liquidity.”
Clearly, this advice was missed by both the Woodford Equity Fund and M&G, where recent demands by investors for their money back were met with stony faces and closed doors. It’s also one of the reasons why at Citywide, we never invest in ‘real’ property funds, where your money may be ‘trapped’ in a shiny new office block that’s slow to sell. Instead, we use Real Estate Investment Trusts (REIT) that give a good return without the worry of whether you’ll be able to sell a property on the very day you need to.
Too often, in my now many years of experience, we have seen investors undone by investment managers that promise the earth but fail to deliver because events overtake them. Whether it’s Mr Woodford’s move away from his tried-and-trusted approach of investing in out-of-favour large-cap stocks, or the inherent mismatch of promises made by the M&G Property Portfolio fund that you could have daily dealing in an asset that can take weeks or months to sell. Events outside of their control meant their liquidity promises evaporated faster than a puddle on a hot day.
We don’t work that way. We put ourselves in our clients’ shoes and understand that every investor wants liquidity and generally they want it now. So, we focus on how liquid our investment recommendations are, and ensure every fund does exactly ‘what it says on the tin’. It’s not rocket science but it works.
Unfortunately, not everyone thinks as we do, so if you’re looking for a solid approach to liquidity, pick up the phone and speak to us. Call 01372 365950
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