Of all the issues highlighted by the implosion of the Woodford Equity Income Fund, liquidity is perhaps the most worrying. No one likes to feel they have been trapped by events outside their control. In the Neil Woodford saga there are two conflated issues. Firstly, the liquidity of the fund; secondly, the liquidity of some of the underlying firms. It is in the latter respect that some clarification of terms would be a good idea.
“There is some real ambiguity in this area,” says Gervais Williams, senior executive director and fund manager at Miton. The term small cap can apply to a company that is worth £50m or more, or “some loss-making, privately owned businesses where valuations are completely speculative”. Moreover, companies can be illiquid in different ways depending on who has the holdings and how much of a company’s shares they control. A company worth, say, £10m, but with a spread of investors, could be more liquid than a company ten times the size, but with one very large shareholder on the register.
More broadly, Williams worries that if investors are scared off smaller companies because of limited liquidity, it will cut off access to the most dynamic sector of the economy and hamper its growth. We should be funding “companies that provide employment and taxes. It is profoundly adverse for the economy if we aren’t doing that”.
The liquidity opportunity
Perhaps counter-intuitively, one important element when it comes to smaller listed companies is that illiquidity is one of the things that makes them attractive as an investment. “Sometimes the lack of investors in a company is the whole point,” says Stephen English, head of Aim at Liverpool-based investment managers and stockbrokers Blankstone Sington.
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