Woodford and H2O: The Perils of llliquid Funds

No matter where funds are registered and sold, they can succumb to a vicious circle if they hold illiquid securities, says Morningstar columnist John Rekenthaler

John Rekenthaler 5 July, 2019 | 2:44PM

Liquidity

This is a tale with disparate threads, but a single moral: bad things happen when funds that are priced daily, and that offer daily liquidity to shareholders, hold securities that are neither priced frequently nor can be readily traded.

One prominent example was Third Avenue Focused Credit, about which I wrote this February. The fund bought so many illiquid issues that when it faced substantial redemptions in December 2015, it could not meet those requests by selling securities. It was forced to "gate", that is, to refuse redemption orders, while gradually liquidating its portfolio. The process required two-and-a-half years.

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About Author

John Rekenthaler

John Rekenthaler  is vice president of research for Morningstar.

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