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Investors shouldn’t let someone else’s liquidity problems become theirs

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19 November 2013

Ian Sayers, Director General, AIC.

We hear a lot about the problems of ‘liquidity’ in the investment company sector from financial services firms.  I can’t help wondering if these firms are in danger of arguing themselves out of a job.

After all, recent research from Winterflood Investment Trusts, for instance, showed that the top 25% of investment companies by market cap are trading over £1m worth of shares per day.

So how many retail investors do you know that want to buy more than £1m worth of shares in a day?  No, nor do I.

Ah, I hear some firms cry, but what about advisers operating model portfolios across all their clients, or where they are outsourcing to large discretionary managers, or where a major online stockbroker suddenly faces a flood of orders as a result of its latest hot recommendation.  Surely liquidity is an issue here?

Well, possibly.  But that rather makes my point that it is not the typical investor that has the liquidity problem, but rather the firm that they have chosen to do business with.  And if that means that their customers are being denied access to investment companies, with their better long-term performance, is that something these firms should be shouting about?

Not that open-ended funds are immune to these issues.  Plenty of investors faced problems with open-ended funds investing in property and seeing them close to redemptions in the wake of the financial crisis.  And only this week, press coverage has been highlighting concerns regulators have with the liquidity of open-ended funds more generally.

Liquidity can be an issue, of course, but the concerns for investment companies are not unique and are often overstated.

But this debate also risks missing an even more fundamental question.  If individual investors with relatively small sums to invest are told they cannot have access to investment companies, would they not be better off finding a firm which doesn’t impose its own liquidity problems on them?

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