torata wrote:simoan wrote:SalvorHardin wrote:This is a great advertisment for investment trusts over open-ended funds. In similar circumstances the investment trust's share price would fall without the need for forced sales.
Of course, this does not only apply to OEICs. The same also applies to some ETFs where
there is a veneer of liquidity in the ETF instrument that is not mirrored by the underlying assets. I think some ETF holders are going to get a nasty shock at some point in the future.
All the best, Si
I'd be very interested in hearing more detail/explanation about your comment, Si. Are you talking about synthetic ETFs, stock lending in ETFs, or something else, for example, an ETF that is based in non-liquid assets like property/infrastructure? This is a genuine question, not bait. I have a feeling you've raised this point before, but I can't remember/find it.
torata
CTY has not been a brilliant performer of late, but at least you know it will be a cold day in Hell before Job Curtis is into cold fusion.
The question of what happens to exchange traded funds in a panic, especially synthetics, has never been tested. The ETF industry is essentially a mushroom growth of the years since the global financial crisis, closely associated with the flight to mediocrity that event engendered: trackers adopted as 'core' with actives on the side to gee total return up a bit.
Closet tracking was and is something of a myth, but overt tracking has become more and more easy to sell to your trustees or directors. Nobody will catch much flak for cleaving to the path of the herd. The Woodford story may make behaviour more herd-like: 'Look what befell the wise guy who thought he could mix styles and wander off the Footsie piste.'
For now more people are probably worried about smart, fancy and exotic ETFs that have sprung up around the original concept of plain-vanilla, broadly based and ultra-cheap replicators of indices. But nobody knows what would happen to the original, simple vintage if another 1929 or 1987 hit.
If so much of the market's motion (relatively calm in recent times, perhaps partly because of the swing to passives) is caused by pre-ordained buys and sells in a constant effort to be like everyone else, what gives when almost everyone wants out of equities? Ditto open-endeds such as unit trusts-- in particular the specialist, less liquid UTs which are much more common now than in the last prolonged apocalypse, 1974.
It is a shock that a fund such as Woodford Equity Income should require suspension at a time when markets are sanguine and when its mandate was meant to be predominantly long-term, tranquil and using conventional blue chips. But the deformations its portfolio took on may not be more potentially harmful, if a redemption stampede develops, than for a narrowly focused open-ended fund which stuck to its brief. Not only in known contentious areas such as private equity or real estate, but in the geographical and sectoral byways of sharepicking, stuff may prove hard to dump in a hurry when the unitholders are hollering for their cash back.
We do know what crises can do to investment trusts, generalist or not: prices can drop, sharply and painfully. They can sell at 20-50% below their net asset backing. In 2007-09 the real value of supposedly defensive, UK equity and income ITs in my 'Basket of Eight' halved. But income kept flowing, if a mite less of it, and trusts could be sold, at a price, all the time. For 150 years their format has withstood everything capitalism got wrong.
