So just relying on the assumption that certain asset classes are inherently liquid is not in itself enough – really understanding what is in a portfolio, and how a fund manager assesses and controls for liquidity, is essential. Those managers who think as carefully about how they would exit a stock as when they would buy it can have the advantage here. Even those portfolios that are broadly diversified on the surface can still contain illiquid positions. In difficult markets and when managers are experiencing outflows from their funds, they will tend to sell their largest and/or most liquid positions.
This, of course, can mean that over time (and if the poor market conditions continue) those small, and seemingly relatively insignificant, illiquid positions can become much larger positions in a portfolio – and detract significantly from performance – as well as being virtually impossible to sell. Independent oversight is likewise desirable – we will all be tempted to buy an attractive investment, irrespective of the risks, and so challenging on liquidity grounds is important.
It is all too easy to buy an investment; at times it can be much harder to sell. Here I find myself mirroring Desmond Llewelyn’s final words to James Bond as “Q” in The World Is Not Enough: “Always have an escape plan”. Whether a spy or an investor, you might just need it at times.
James Bateman is head of multi-manager and multi-asset portfolio management for Fidelity Worldwide Investment
