Following the suspension of the Woodford Equity Income Fund, the issue of illiquid assets has been featuring in the media. The fund, valued at £3.7 billion shortly before withdrawals were suspended, was found to have a large portion of its total investment in illiquid assets. This has made assets difficult to sell quickly and raise the funds necessary to allow the fund to reopen. As a result, you may be wondering what an illiquid asset is and how it could affect your portfolio.
Liquid assets: Liquid assets are simply those that are held in cash or those that could be quickly converted to cash. As a result, liquid assets require an established market where there are buyers readily available should you decide to sell. Stocks and marketable securities, for example, maybe considered liquid assets.
Illiquid assets: In contrast, illiquid assets are those that can be difficult to convert into cash quickly. Often, there isn’t a large market and it can take some time to find the right buyer. Illiquid assets may include property, some bonds, alternative investments and stocks in small companies, as well as collectables such as classic cars and art.
In short, if you find yourself facing a financial emergency, liquid assets would give you the means to quickly access cash, whilst illiquid assets wouldn’t.
One in four affected by illiquid assets
Holding illiquid assets that you want to sell isn’t just a problem faced by the likes of the Woodford Equity Income Fund either. Research suggests that a quarter of investors are stuck with assets they want to sell but are struggling to find a buyer for.
Among the assets identified by investors were:
- Unlisted shares
- Debt investments
- Digital currencies
- Classic cars
These types of assets are often harder to sell for two reasons. First, as the assets are typically less common they aren’t priced as frequently, which can make it difficult to gauge their true value. Second, the pool of potential buyers is typically much smaller. As a result, it can take far longer to find the right buyer.
Should you avoid illiquid assets?
There’s no right or wrong answer to this. As with many financial decisions, it depends on your personal goals, overall financial plan and, of course, your previous experience of dealing or investing in these assets. For some, illiquid assets provide greater investment opportunities and maybe efficient for tax purposes. However, they aren’t suitable for the majority of investors.
When investing in illiquid assets it may not be purely to make a return in the long-term. For example, investing in classic cars or collectable items may be for your personal use and enjoyment as much as an investment proposition. As a result, having a limited market to sell it may not be an immediate concern. But, remember circumstance and goals do change over time.
Among the questions to consider if you’re thinking of investing in illiquid assets are:
- What liquid assets do you have to fall back on should you face a financial emergency?
- What is the likelihood of needing to sell illiquid assets quickly?
- How is the rest of your investment portfolio invested?
- Why do you want to invest in illiquid assets?
- What is your risk tolerance when investing?
- What market is there for selling the illiquid asset you’re considering?
- Historically, how has the illiquid asset you’re considering performed?
Illiquid assets may have a place in your wider financial plan and considering how and when you may sell the asset can help you ensure it’s the right decision for you.
It’s also important to note that most illiquid assets are not regulated by the Financial Conduct Authority (FCA) and, therefore, you do not have the protections afforded by legislation. Most financial advises are not able to advise on some illiquid assets, say the value of a car or piece of art. These investments are often a personal choice.
If you’d like to discuss investment opportunities with a professional, please get in touch. We’re here to help you build a balanced investment portfolio that reflects your aspirations and risk tolerance, including whether illiquid assets would be suitable in your circumstances.
Please note: Investments carry risk. The value of your investment can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance.