In this article, we describe how at Royal London Asset Management (RLAM) we consider and manage liquidity in our sterling credit funds, and explain why a clear, well-established and tested investment process is so important.
Recent events have highlighted the risks of illiquidity in open-ended funds and active managers are under pressure to demonstrate that their funds are adequately liquid, especially in times of market stress. In particular, clients are rightly questioning exposure to unlisted, small and illiquid stocks that are less easily traded than larger-capitalisation stocks.
There are, however, some unhelpful misconceptions concerning this important aspect of fund management that must be ironed out from the outset. Most importantly, equities and bonds are fundamentally different: while there are some aspects of liquidity that apply to both, there are other areas where this is not the case.