How to Avoid a Fund Liquidity Trap

The suspension of the Woodford Equity Income fund has highlighted the tightrope managers of open-ended funds walk in managing inflows and outflows

Cherry Reynard 8 July, 2019 | 2:38PM

Running tap

Intuitively, most investors understand that in an open-ended fund, managers must buy more shares when they have inflows and sell existing holdings when they have redemptions. However, it is easy to underestimate the profound effect these flows can have on fund performance. The risks in managing this have been thrown into the spotlight with the suspension of the Woodford Equity Income fund.

Managers of open-ended funds, particularly those that are contrarian in style, walk a tightrope. They may believe they have a portfolio of undiscovered gems, ripe for repricing, but if the market is slow to react and their investors start to lose heart, outflows may force them to sell out of their existing holdings.

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About Author

Cherry Reynard

Cherry Reynard  is a financial journalist writing for Morningstar.co.uk.

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