Funds vs Investment Trusts, Liquidity.

[Deleted User]

I am looking at:
Baillie Gifford American Acc (Open End Fund) and The Baillie Gifford US Growth Trust plc (Investment Trust)

They have very similar performance and holdings.

However I'm thinking that it would be easier to sell the fund in say 20 years. Assume each fund/trust holds 50 stocks each. When selling the investment trust, I am selling the 50 stock to the SAME person. But with the fund, I am selling each stock to 50 different people. Therefore the fund seems like it will be easier to sell. Does anyone agree/disagree?

londoninvestor

With the open-ended fund, you're selling the units back to the fund manager - the fund manager commits to buy and sell every day, and there isn't a secondary market where you sell to a third party.

So except in the worst circumstances, you know you can sell the fund for the NAV of its assets (potentially minus a small spread, either explicit for a unit trust, or embedded in a "single swinging price" for an OEIC such as the one you mention).

Whereas for an investment trust, the price will fluctuate more around the NAV (it can be either a premium or a discount) according to market demand for the investment trust.

In that sense, for liquid asset classes, the OEIC is "easier to sell" without risk of having to accept a discount. (Of course the converse is that if you get to buy an investment trust at a discount, and the market then narrows the discount or moves to a premium, then happy days.)

---

Now what does "the worst circumstances" mean? It's where the fund manager declares itself unable to sell the underlying assets, and so either closes the fund to redemptions, or imposes a much bigger spread than normal. This is a risk where the fund holds a large proportion of illiquid assets - see Woodford Equity Income for a topical example, or various property funds around 2008. It's very unlikely for a fund invested in liquid equities.

For these illiquid asset classes (e.g. property and unquoted equities) an investment trust may give you a better chance of selling in a crisis, albeit only at whatever price the market is prepared to pay for it. Choosing an investment trust for these asset classes also insulates you from the risk that the manager (or rather fund accountant) sets a selling price for the fund which overvalues the illiquid assets in a crisis, and hence transfers value from remaining shareholders to the sellers.

ColdIron

As a general rule ITs are less prone to liquidity problems. Funds are more likely to have issues with large redemptions as we have seen recently with Woodford, they can be gated. ITs are traded on an exchange. When you sell an IT it may be one buyer or as many are required to cover your sale. When you are 'selling' a fund you are just redeeming your investment with the fund manager, what they choose to do with it is up to them. In neither case are you selling individual stocks

But in reality, given the size of those funds/ITs and the value of the average persons holding I wouldn't imagine it being a problem for you

londoninvestor

Actually, you posted a related question a few months back:
https://forums.moneysavingexpert.com/discussion/comment/75984584#Comment_75984584

Are we answering your question, or are we not following what you're getting at?

bowlhead99

newbinvestor wrote: »

I am looking at:
Baillie Gifford American Acc (Open End Fund) and The Baillie Gifford US Growth Trust plc (Investment Trust)

They have very similar performance and holdings.

However I'm thinking that it would be easier to sell the fund in say 20 years. Assume each fund/trust holds 50 stocks each. When selling the investment trust, I am selling the 50 stock to the SAME person. But with the fund, I am selling each stock to 50 different people. Therefore the fund seems like it will be easier to sell. Does anyone agree/disagree?

Londoninvestor and Coldiron have covered it, but as I had started to respond before I saw that they had done in the meantime...

I think you misunderstand the structures.

An open ended fund is a collective investment scheme where a bunch of investors come together, give their money to a fund manager in exchange for units/shares of the fund, and then the fund goes and spends that money buying 50 stocks which it will hold.

If another person comes along and wants to subscribe to the fund, they give that money to the fund manager, the fund manager creates some units/shares for them, and then the fund spends most of the new money on making additional purchases of the 50 stocks (may leave a bit in cash for potential future opportunities in interesting stocks, or to have on hand for redemptions, as below).

If someone wants to get out of the fund (redeem some of their shares/units) they will put a sell order in with the fund manager, who will arrange to redeem (buy back) and cancel their units/shares for a cash payment equal to the asset value. If there isn't sufficient cash on hand inside the fund, the fund manager will sell some of the fund's 50 stocks to be able to afford it.

In extreme market conditions or if everybody wants to redeem their units/shares in the fund at once, it may take a while for the fund manager to dispose of enough of the 50 stocks to generate enough cash to pay the investors. This has been seen for example in some property funds where they did not hold 50 stocks, they held 20 commercial property developments, which can't be sold overnight on a stock market to raise instant cash to meet the redemptions. Or recently with Woodford's income fund where some of the holdings were illiquid. Generally, stocks can be sold at short notice though there may be practical difficulties in getting a good price if loads of people want to get out at the same time for some reason and the fund has to sell a massive amount of each of its stocks.

Still, you are barking up the wrong tree with, "with the fund, I am selling each stock to 50 different people". You are selling your shares in the fund back to the fund manager, and to raise cash to be able to afford to do that, the fund manager may sell some of the 50 stocks held by the fund to one person or to 50 people or to 500 people so that the fund gets cash. Then the fund gives you the cash, and cancels your units / shares.

With a closed-ended vehicle like an investment trust, which is not open for ongoing subscriptions and redemptions, the IT owns 50 stocks and the investors own shares of the IT. As it is not an open-ended investment vehicle, the fund manager is generally not interested in buying back any of the shares issued by the IT or in creating new shares in exchange for new cash.

So if someone new wants to invest money into the IT, and the IT does not want to create any new shares, the investor will simply go to the stock exchange and bid for the shares of the IT up to the amount of money he wants to spend, buying some existing shares of the IT off someone else in the market who would like to sell for that price. The IT's pool of assets (the 50 stocks) is unaffected as the IT does not receive any more money out of the process and does not need to spend it on buying more of the 50 stocks.

Likewise if someone wants to sell up and get their money back, they will sell their shares to the highest bidder on the stock exchange and that bidder will become the new owner of the shares in the IT. Again the IT's pool of assets (the 50 stocks) is unaffected as the IT does not play any part in giving money back to the exiting investor and doesn't spend any money in the process. The IT still owns the same amount of each of the 50 stocks that it held the previous day.

Due to the way the process of selling an IT works (you have to find someone who wants to buy the IT and take exposure to the 50 stocks wrapped up in an investment product with an ongoing management fee and strategy etc), the price of the IT's shares on the stock exchange will typically fluctuate and differ from the value of the underlying 50 stocks on their own (known as a discount or a premium).

Again your analysis is a bit off: "When selling the investment trust, I am selling the 50 stock to the SAME person" is not necessarily true: if you are trying to sell 1000 shares in the investment trust it may be that bowlhead99 buys 600 of them and londoninvestor takes the other 400 ; from your perspective, you just offload them to your stockbroker / investment platform and he handles it for you. Just like if you want to redeem out of the open ended fund, you put your order in with the investment platform / fund manager and they redeem your holdings when next they can (usually in the next working day).

But to summarise:

- Usually you would not have a problem redeeming your shares in a mainstream open ended investment fund, nor selling your shares in a mainstream IT via the stock exchange.

- For an IT, in tough market conditions, the shares in the IT that you are trying to sell on the stock exchange may change hands for less than you hope (perhaps a large discount to the value of the 50 shares in its portfolio) but if you lower the price enough, someone will bite.

- Whereas for an open ended Fund, in tough market conditions, if the fund manager is not going to be able to sell enough of his 50 stocks quickly and easily for a decent price he might simply freeze redemptions and not let you sell at all, until he has had a chance to gradually unwind some of his holdings in the 50 stocks.

So it is not really the case that 'the fund will be easier to sell':

- For an IT on the stock market there is always a buyer, but it is an open market and you might not like the price offered.

- For the Fund, the fund manager has to generate enough cash on hand by selling some of each of the 50 stocks (or a lot of 1 of the stocks and change the portfolio mix, which he will do from time to time; or simply get new cash from a newly subscribing investor who wants to buy in).

[Deleted User]

Thanks bowlhead, great great post. I do understand all of it but still a bit rough using the correct terms, shares, units, etc.

If these 50 stocks in the IT or open ended Fund are falling, I still believe it'd be easier to sell fund units than IT shares.

For example if I'm selling a man's jumper, a woman's blouse and a kid's hat in the same bundle, to the same buyer compared to selling each one individually. It would be quicker and easier to find a buyer selling them individually (or selling my units in the fund for the fund manager to sell them individually). If you were looking for ONE buyer to buy all 3 (ie all 50 stocks), you would probably have to drop your asking price hence selling at a discount, which isn't exactly good for the seller.

londoninvestor

newbinvestor wrote: »

For example if I'm selling a man's jumper, a woman's blouse and a kid's hat in the same bundle, to the same buyer compared to selling each one individually. It would be quicker and easier to find a buyer selling them individually (or selling my units in the fund for the fund manager to sell them individually).

The ease here comes because Primark (or whoever you bought them from in the first place) is obliged to buy them back from you at pretty much their market price, unless there is severe disruption in the jumper/ blouse/ hat market

AnotherJoe

newbinvestor wrote: »

Thanks bowlhead, great great post. I do understand all of it but still a bit rough using the correct terms, shares, units, etc.

If these 50 stocks in the IT or open ended Fund are falling, I still believe it'd be easier to sell fund units than IT shares.
It's no different at all. Click point click click done

For example if I'm selling a man's jumper, a woman's blouse and a kid's hat in the same bundle, to the same buyer compared to selling each one individually. It would be quicker and easier to find a buyer selling them individually (or selling my units in the fund for the fund manager to sell them individually). If you were looking for ONE buyer to buy all 3 (ie all 50 stocks), you would probably have to drop your asking price hence selling at a discount, which isn't exactly good for the seller.

Or if they are sought after jumpers blouses and hats they might sell at a premium asa collection compared to the costs of buying all separately, so that arguments a wash, with the difference that there's always someone to buy the IT* even at a discount whereas if the jumper blouse and hat turn out to be substandard there might be so many clamouring to sell that the OEIC manager is forced to Stop people selling the fund. There's an obvious current example with Woodford.
However, essentially I think your argument is far too theoretical and in practice and with this fund / IT the real differences are in the costs to hold these investments.

* just look at WPCT for an example.

bowlhead99

newbinvestor wrote: »

Thanks bowlhead, great great post. I do understand all of it but still a bit rough using the correct terms, shares, units, etc.

An IT has issued shares which you can buy and sell on an exchange.

An open ended fund will do a new issue whenever they get a new investor wanting to buy in. It issues either 'shares' (if an 'open ended investment company' or 'investment company with variable capital') or 'units' (if a 'unit trust') ; as the buyer of an open ended fund you will generally be indifferent whether it is an oeic/ icvc or a unit trust, that's just a quirk of history from the investment manager - so I just used 'shares / units' when talking about the ownership piece that the fund manager issues to you in the open ended fund.

For example if I'm selling a man's jumper, a woman's blouse and a kid's hat in the same bundle, to the same buyer compared to selling each one individually. It would be quicker and easier to find a buyer selling them individually (or selling my units in the fund for the fund manager to sell them individually)

If the manager needs to sell 50 different garments he has to tell his broker to go and place 50 sales orders on the garment market and wait for them all to be filled. A couple of them may not get filled at a good price, because who wants to buy a tatty old hat.

If you go to sell one rack of clothing you will tell your broker to offer it for sale on the garment market and someone who wants a rack of clothing (e.g. wardrobe department at a movie studio, a person that has lost all their clothes in a fire) would come and buy it. The fact that a rack of clothes is a different 'product' with a different 'audience' does not mean you can't sell it. If the rack contains a tatty old hat, the buyer will just think, "ok, I don't really want the hat, but the other 49 things are fine and I am buying a strategy off the shelf - not individual items".

If you were looking for ONE buyer to buy all 3 (ie all 50 stocks), you would probably have to drop your asking price hence selling at a discount, which isn't exactly good for the seller.

That is not really the case because the target audience for the IT when you try to sell it - people who might buy the share in the trust - are investors deliberately looking for whole portfolios of assets and a management service, not individual stocks.

Imagine you are buying a trust yourself, and it holds 50-100 stocks and its price has been set in an orderly market. Do you say, hmm I don't want all of those, please drop your asking price, it will be difficult to get me to buy all those stocks as one job lot if you don't drop the price? No you don't - if you were buying the open ended fund you would take exposure to those 50-100 stocks without quibble, and likely you will pay the going rate for the trust just the same.

If the market doesn't think much of the prospects of the trust you might pick it up for a discount. So, when you sell, you won't mind if you have to give a discount. If the market likes the prospects, when you buy in you might have to pay a bit more than the underlying assets are 'worth' individually, but then, it's quite possible that when you sell, you'll find someone who would be willing to pay more than what the assets are 'worth' to get in on the action.