He exemplifies these statements with an example: “How quickly could I sell the Ritz Hotel on Piccadilly if I needed the cash? If the price was £10m it would trade in an instant; if asking £500m it would take a little longer or not trade at all.”
In other words, there is always a clearing price at which willing, rather than forced, sellers and buyers will meet, price being a perception of future value.
The adviser said that, in his view, the single most important responsibility of the board of directors of an investment trust is to “steer the share price to a level where volumes can be transacted”. Some believe that level should be Nav.
For financial products, liquidity is principally determined by two sets of factors, the qualities engendered by the product itself that make it attractive as a potential investment, and the mechanism by which the product may be discovered and dealt in.
For an investment trust there are considerably more moving parts determining the share price than for an Oeic. These can affect liquidity markedly.
Simon Coulson is the author of the report ‘Secondary liquidity in the investment company sector’ published by the Association of Investment Companies in December 2012
The liquidity of investment trust shares Product quality factors
• Performance
• Discount volatility – more important than absolute level of share price discount, although if this is large it is telling the board that the market has doubts about the veracity of the net asset value valuation or the prospects for the company going forward
• Marketing efforts of the board, the manager and the company’s broker
• Availability of accurate price and Nav information
• Availability of up-to-date portfolio and performance information through a number of portals and third party research providers
• Reputation of individual manager and investment house against competitor managers and competitor products (Oeics, ETFs, structured products)
• Structure of the company (debt, subscription shares, performance fee – any prior charge that makes simple evaluation of share price and net asset value performance more complicated)
• Market capitalisation – absolute level, including whether the investment company is a member of the FTSE 250 or Small Cap index
• Presence of buy-back programme
• Presence of continuation vote
• Tax and regulation (eg lack of ‘ISAbility’)
Source: Secondary liquidity in the investment company sector report December 2012
