Examining investment companies’ role in a liquidity challenged world

Matthew Finch, Associate Director, Smith & Williamson

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Mar 07, 2019

Some financial advisers might be forgiven for wondering, where all the new fund launches have gone?

After all, in today's fast-paced, algorithm-traded, block-chain charged financial markets, can today’s popular funds, created and launched before the advent of the smartphone or even the internet, really be fit for purpose?

We know that many investment vehicles undergo a series of refreshes to keep them up to date and desirable, but could it be that financial advisers are about to be left in the slow lane by a lack of new open ended product offerings?

Looking at Smith & Williamson’s Managed Portfolio Service (MPS) I note with interest that the oldest ‘fund’ we use is an investment company that first popped up in 1906 - the year the Wright Brothers were granted a patent for part of their new ‘flying machine’.  We have a plethora of funds launched in the 1980s and 90s, as well as others from more modern times. The most recent of which, another investment company, was launched in 2015.  

For us one important issue, particularly when considering rapid developments in financial markets, is liquidity.  We consider liquidity at every step of the investment process from our allocation to a market through to choosing the best investment vehicle to access that market. 

Consider for example two major asset classes where liquidity has and is being challenged - property and fixed interest.  As we know, both markets are subject to liquidity stress, both are closely watched by market participants and of course, both are subject to hawk like attention from the regulators.

Without going over well documented ground, any financial adviser who observed the gating of ‘open ended' property funds post the Brexit referendum will be aware that anything from trying to redeem a monthly income payment to a change in asset allocation created a ‘lock down’ for a number of client portfolios.  With that in mind such illiquidity can quickly create a chain-like effect leading to the worst scenario of all - a client’s inability to access their money!

Where we have a concern about market liquidity, be it in property, bond or equity markets, our preference is to include closed ended investment companies. Overall the allocation to investment companies within our MPS ranges from just over 15% for our most cautious portfolio to just under 30% for the most growth focused portfolio that we run. These weightings are of course blended with active and passive open ended funds.

So in our pursuit of investment returns and seeking to defend against losses we are acutely aware of liquidity. 

The stalwart of 1906, the Blackrock Smaller Companies Trust, offers us compelling access to the UK’s small cap equity market. Meanwhile, the most recently launched in 2015, Sequoia Economic Infrastructure Income, helps us to resolve the conundrum of a rising interest rate environment for our fixed interest exposure as well as providing a lower correlation to credit markets. Their appropriateness should not be measured in the number of years that divide the two of them, but by the accessibility they offer investors keenly aware of the fast-paced liquidity challenged world that we operate in.

As for the opening question about where have all the new fund launches gone?  Well, whilst the active vs passive debate rages on, spare a thought for the open vs closed ended debate sitting quietly, and for some quite intriguingly, on the side lines.

Perhaps the best and most innovative product development is actually occurring in the closed ended space.  Away from the easy information flows that fill an adviser’s inbox. Whatever the reason, remember that investment companies often fill a large gap left by the limitations of even the newest active and passive open ended funds.

Matthew Finch, Associate Director, Smith & Williamson



All data correct as at May 31 2018

Ref: 76718hp



By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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Note to editors

Smith & Williamson is an independently owned financial and professional services group. The firm is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices, entrepreneurs and mid-to-large corporates. The group’s c1,700 people operate from a network of twelve offices: London, Belfast, Birmingham, Bristol, Cheltenham, Dublin (City and Sandyford), Glasgow, Guildford, Jersey, Salisbury and Southampton.

Smith & Williamson Investment Management LLP is part of the Smith & Williamson group.

Smith & Williamson Investment Management LLP

Authorised and regulated by the Financial Conduct Authority

Smith & Williamson Investment Services Limited

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority

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Smith & Williamson

• Active portfolio management, ensuring diversification and risk management. • A dedicated MPS investment team, supported by over 50 investment professionals, giving you access to our broad intellectual capital. • Ongoing monitoring of our model portfolios by DT, Synaptic and Defaqto Engage ensuring our models stay within the permitted risk parameters. • No set rebalancing dates, enabling our MPS managers to amend asset weightings as and when their views on markets and investment strategy change. • Our MPS has been awarded a 5-star Defaqto rating in 2014, 2015, 2016, 2017,2018 and 2019.

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