Terry Smith: ‘Liquidity is important; I will never invest in unlisted companies’

Terry Smith has vowed that his flagship open-ended fund Fundsmith Equity will not hold shares in unquoted companies.

Terry Smith has ruled out ever investing in unlisted companies in Fundsmith Equity, his flagship open-ended fund.

In the fund’s half-yearly report to investors, released in late August, Smith noted that fund liquidity is firmly in the spotlight, following the decision by Britain’s best-known fund manager Neil Woodford to block investors from withdrawing money from his main fund, LF Woodford Equity Income.

He pointed out that the fund has published a liquidity measure on its monthly factsheet since January 2012, adding: “We have always regarded this as an important subject”. He added that Fundsmith Equity “never invests, nor will it ever invest, in unquoted companies. Nor does it own any small or mid cap companies”.

He says: “The smallest companies from a market value perspective that the Fundsmith Equity Fund invests in are all members of the FTSE 100 index and the average market capitalisation of our portfolio companies at the end of June was £116.3bn.”

The fund’s factsheet at the end of June shows that nearly two-thirds (61%) of Fundsmith Equity could be liquidated within seven days.

The latest news on the high-profile fund suspension is that LF Woodford Equity Income will remain closed until early December; the fear among industry commentators is that the debacle risks putting off prospective new investors, first, from investing in general, but also from choosing an active fund manager.

Following the fund’s suspension, the Bank of England has said that it is considering new rules to help open-ended investment funds cope with waves of redemptions.

In its Financial Stability Report, the Bank said that it would work with the Financial Conduct Authority to look at the risks associated with the liquidity mismatch for open-ended funds that invest in illiquid assets.

Separately, the Investment Association (IA) has also announced it is considering introducing a new type of open-ended fund structure, which will be called a long-term asset fund.

The basic principle is that this type of fund will facilitate investments in illiquid assets, such as property, infrastructure, private equity and private debt. To provide a better structure for these investments, the fund will be able to receive new money to invest, but investors will not be able to sell their holdings on a daily basis. Instead, investor redemptions will be facilitated at “appropriate time intervals”, says the IA.

However, the IA has indicated that long-term asset funds will not be directly available to self-directed investors.

Jargon buster: what is liquidity?

Liquidity is the availability of liquid assets (those that can be quickly and easily converted to cash without losing value) to a company or fund. If the holdings in a fund are deemed ‘liquid’, investors should have no problem withdrawing their money. If the holdings are harder to sell and are ‘illiquid’, funds will struggle to meet any increase in investor withdrawals on a daily basis. In normal market conditions, funds that hold illiquid assets will have sufficient liquidity for their needs, often by keeping a certain amount of cash, but in times of heavy selling it is a different story.

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