Liquidity is often top of mind for SMSFs when it comes to investing in asset classes outside of equities. Liquidity in listed investments is often misjudged with more factors to consider than simply whether you can buy or sell shares in the fund.
Liquidity might be top of mind for SMSF trustees who hold a mix of managed funds and other exchange traded products, but it’s also an area where more education is needed to dispel common myths, experts agree.
Ever since the global financial crisis, when falls in global share markets led to a number of funds limiting redemptions, liquidity has been an important issue for SMSF trustees, Michael Blomfield, researcher and Investment Trends CEO, notes1.
“As typically long-term investors, SMSF trustees have long memories and a conservative approach to managing liquidity that shows no sign of being loosened,” Blomfield says.
Blomfield’s comments come on the back of the AMP Capital Survey of 679 SMSF trustees in December 2017 in which “lack of liquidity” is among the top reasons for trustees to avoid investing in asset classes outside of equities.
However, it’s possible this resistance to investing in alternate asset classes could be somewhat misguided.
“Liquidity is important but you need to be sure you’re thinking about liquidity in the right context. For instance, just because you can trade in and out of a listed ETF, that doesn’t necessarily mean the underlying assets are liquid,” says Sam Amora, an Investment Strategist with AMP Capital’s Dynamic Markets team.
Sometimes investors can misinterpret the ability to trade in a fund with the liquidity on the fund’s underlying assets.
Amora notes that liquidity can be tested in periods when there are high redemptions and negative sentiment continues to grow.
“Investors want to be sure they’re investing in investment vehicles with a view to their underlying liquidity,” he says.
Portfolio managers of actively managed ETFs will take steps to manage a portfolio to ensure liquidity in the funds’ underlying portfolios.
“For example, that is one of the reasons we have avoided high yield credit ETFs in the AMP Capital Dynamic Markets Fund at this stage of the cycle where credit spreads are at historical lows. A large ETF with, say, over US$15bn in size may give investors a sense of security in that they can get out at anytime, but if you start to get a run of investors leaving during a stress event, that liquidity mismatch between the ETF and the underlying assets can create issues for investors,” Amora says.
Liquidity assessment is an important feature of an actively managed multi-asset portfolio, Amora notes.
“We assess liquidity in conjunction with specialist exposure management and dealing teams,” he says.
“Liquidity is a critical consideration in terms of both whether it is a viable investment first, and then if so, how it impacts allocation sizing” Amora continues.
“Liquidity is especially important in a dynamic fund which has broad flexibility, so you need to be able to get in and out quickly,” Amora notes.
Assessing the liquidity of an ETF can involve looking at on-screen volume at both the ETF and underlying security level – using a tool such as Bloomberg – but there is also off-screen liquidity which is why professional investors and "exposure management teams" utilise relationships with a thorough panel of execution brokers to assess market depth, Amora describes.
Investors might rightly be concerned about liquidity when investing in funds – but it’s important to make sure you’re focusing on the right thing when it comes to liquidity and not whether you can buy or sell shares in the fund itself.
As always, the idea for SMSF trustees is to create a diversified portfolio which will include some assets that are more liquid than others.
1 Direct quote from Michael Blomfield, Investment Trends CEO
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