Interested in working together?
If something here resonates and you'd like to talk further, we'd love to hear from you.
Get in touchIf something here resonates and you'd like to talk further, we'd love to hear from you.
Get in touchThe majority of the funds investors hold in their SIPPs or ISAs (in the UK) or 401(k)s (in the US) are “daily dealing funds”.
That means that investors can buy or sell units in those funds any day that the markets are open. That generally means any weekday, but not bank holidays, which can be different depending on both where the fund is issued and where it’s invested. A fund issued in the UK will be closed on Christmas and New Year. But if it’s mostly invested in US stocks, it will probably be closed for Thanksgiving as well.
For the days when it’s open, the “dealing days”, all the underlying stocks in the fund are priced at a single time of day, the prices are multiplied by the number of stocks held, and it’s all added up to get the overall price of the fund.
So far, so good and all very reassuring. Daily dealing sounds like you can get your money back whenever you want and at the right price. But there’s a catch that most people don’t understand. Just because a fund lets you buy and sell units every day, it doesn’t mean that what it’s actually holding in the portfolio can be bought and sold that quickly.
The word “liquid” is used in finance to describe how quickly something can be bought or sold. Some things, like government bonds, can be sold very quickly throughout the day and so are very liquid. At the other extreme, property like houses and office blocks take months to sell and are very illiquid. These examples are clear-cut but there is a grey area when it comes to stocks and shares.
In theory, company shares that are listed on a stock exchange should be easy to sell. They are right there, on the exchange, with a price and available for anyone to buy and sell them. But just because they can be sold, it doesn’t mean that they are. Shares of companies that are small, or from developing countries, or that no-one is really interested in, generally do not have a lot of buyers or sellers lined up.
That means that when you come to sell, it can be very hard to find a buyer, and you might need to drop the price a long way before offloading your shares. Which is bad news because dropping the price means losing money for the fund.
In normal markets and for growing funds, this is generally not a problem. A portfolio can stomach holding a small amount in these kinds of companies. Fund managers might want to buy them because they think they’ll grow, become loved and go up in price. And if the fund is growing, anyone wanting to take their money out of the fund can be matched by other people putting their money in and so the underlying stocks can be held without bothering anyone.
But if there is a market crash, then people might get scared and all want their money out at the same time. Or they might just lose faith in that particular fund because it’s been in the news. Or the fund might have an investor that is a very large part of the fund and wants to get out. Then it’s a different story.
If any of those things happen, the fund manager has three bad options available to her:
So there are no good options and portfolio managers spend a lot of time balancing up the liquidity of what’s in the portfolio, trying to get a good spread of investors in their funds, and hoping that markets do not lead them into an impossible position. Because this isn’t a flaw in any one fund, it’s a structural feature of how daily dealing works when the underlying shares are not as liquid as the top-level fund.
So daily dealing can be a great benefit to investors, it’s something that they value a lot, but it comes with a hidden condition. And that condition is normal markets.
For advisers, the useful question isn’t whether a fund deals daily. It’s how much of the portfolio could actually be sold in a day, or a week, without moving the price. Most fund managers measure this, and the good ones will be happy to talk about it. A few things worth asking:
None of these answers rules a fund in or out on its own. But the gap between what a fund promises and what it holds is exactly where the surprises come from, and it’s far easier to understand before markets turn than after.
Daily dealing is a promise about the fund. Liquidity is a fact about what’s inside it. You want to make sure that the two line up as much as they possibly can.