Type ‘UK investment fund scandal’ into a search engine and it won’t take long to find articles about Neil Woodford, the star manager turned industry bogeyman. The implosion of his flagship Woodford Equity Income fund – which began the process of winding up on the back of liquidity woes in 2019 and is yet to sell off all its holdings – made it blindingly obvious that open-ended funds are poorly equipped to hold illiquid assets. That impression has only strengthened with the various open-ended property fund suspensions of recent years.
With no need to meet investor redemption requests and therefore sell assets in a hurry, investment trusts don’t have such problems. But we shouldn’t presume that they are immune to the complications that come with holding illiquid assets – or a few headaches of their own. That much has become apparent in recent weeks.
To start with, we should note that investment trusts can also have trouble selling illiquid assets – or their own shares – at a desirable price when needed. To cite one extreme example, the troubled homelessness accommodation specialist Home Reit (HOME) has rejected a takeover offer from Bluestar, noting that it would be “unlikely to maximise value for shareholders”. Home Reit certainly faces some idiosyncratic problems, but others have had issues too: the US Solar Fund (USF) had touted the possibility of selling off its portfolio as part of a broader strategic review, but the board recently announced that it “has yet to receive any formal asset sale proposals that it considers in the best interests of its shareholders”. In another update, the board of Aquila Energy Efficiency (AEET), which failed a continuation vote in February, warned that a managed run-off of the portfolio would be unlikely to realise the full value of the portfolio for cash in the short term because its assets are so illiquid. On a slightly ominous note, the board elaborated by noting that some of the trust’s investments came with a maturity of around 15 years.
Valuations of illiquid assets are also problematic because they are subjective and open to interpretation. We’ve seen names such as Chrysalis (CHRY) and Scottish Mortgage (SMT) significantly write down the value of some unquoted assets as market sentiment wilted in the past year or so, and more generally investors don’t always trust net asset value calculations – something that’s reflected in the enormous share price discounts of many of the private equity trusts.
More banal uncertainties can cause problems too, with the ThomasLloyd Energy Impact trust recently suspending its shares after “material uncertainty” emerged over the fair value of its investment in an asset owned by SolarArise, a Delhi-based outfit that focuses on using abandoned land for solar projects. The trust noted that rising costs relating to the construction of a solar plant could mean that additional equity would be needed to construct it, “potentially decreasing the project returns and its commercial viability”.
Those sticking it out with an illiquid portfolio that has had a bad patch of performance, meanwhile, should not assume a quick turnaround. Investors in the former Woodford Patient Capital trust, run in recent years by Schroders and recently rebranded as Schroders Capital Global Innovation (INOV), are still sitting on some deep losses since its initial public offering. Closed-ended structure aside, investors piling into anything illiquid will need plenty of resilience.
