What is portfolio liquidity and why is it important?


By Jean Strock, Financial Adviser – 01 April 2021

One of the advantages of an investment portfolio with Saturn is the ease of setting up a regular payment or withdrawing a lump sum from your portfolio. Remember a time when you needed a quick withdrawal  for a cruise or an overseas holiday? Part of what makes it easy to withdraw funds from a Saturn portfolio is liquidity, a financial concept which refers to the ease with which you can convert an asset into cash without affecting its market price.

The most liquid asset is cash already in your bank account. Term deposits are less liquid than cash because they are locked in for a fixed term and can incur break fees if you request to “cash up” earlier.

The share market is generally very liquid although some smaller stocks on the NZ exchange are not actively traded and relatively small trade volumes can move the market price. 

Assets such as art and collectibles are less liquid because of the limited number of potential buyers, and prices can be quite fickle.

We don’t tend to think of property as illiquid because we read and hear about property sales all the time in the press but remember, it can take weeks or months to sell and then settle on a property. Depending on market conditions and where the property is, it can potentially take much longer.  Property is also an all or nothing trade. As they say “you can’t sell the porch” although it can be possible to extend your mortgage if the bank will come to the party. Again not always a quick process.

Apart from the disadvantage of not knowing what your property is worth until the day you go to auction, there are also sizable costs involved with trading property. Real estate agents and legal fees take a bite as can the Bright Line tax on gains if you sell a property that is not your main residence within five years of purchase. As per the recent government announcement the Bright Line test moves to ten years if you buy an existing property from 27 March 2021.

A diversified investment portfolio comprising managed funds and/or listed investments (share and bonds) is generally very liquid but comes with the caveat of “under normal market conditions”. At times of severe market volatility asset prices can fall very quickly and by the time a request to sell is actioned, the price may have fallen significantly. This is certainly the case with shares. Yes, you can sell at the prevailing market price, but the price you get may be considerably lower than what you expect.

Another potential issue is when fund managers temporarily close a fund to protect existing investors although this would be in exceptional circumstances. Normally fund managers maintain a cash buffer to cater for investor deposits and withdrawals, however, if there is a ‘run’ on a fund, a fund manager may be forced to sell good investments at low prices to meet redemption requests. Generally, a manager would prefer to take advantage of a market correction and buy into a cheap market.

Why is liquidity important? At some point, you will want to cash up some or all your investments. You may have unforeseen circumstances requiring quick access to cash. An asset you cannot sell quickly won’t help here, and an asset that is either expensive to sell or that realises much less than it is worth is less than ideal.

How liquid is an investment portfolio with Saturn?

Under normal market conditions, very liquid. We generally recommend clients retain a cash balance in their portfolios to meet small cash withdrawals, which can be made in one to two days, depending on the currency the cash is held in. If we need to sell investments to meet withdrawals, we can generally complete this within 5-10 working days from the time of the request through to the cash being in your bank account. That is one of the reasons why we do not recommend investing in illiquid assets such as syndicated property. 

We sell (and buy) all investments through the NZX Wealth Technologies investment administration platform which enables us to administer a wide range of investments on your behalf through a single platform. You can view cash and asset transactions on the home page of your Saturn client portal.

In summary, liquidity is the ease with which you can convert an asset into cash and it is important because without liquidity, you may not have access to cash when you most need it. An investment portfolio comprising managed funds and/or listed assets can be one of the more liquid forms of investment providing a ready access to regular payments or lump sum withdrawals. It can fit very well alongside less liquid forms of investment such as property.

For further information contact one of Saturn’s financial advisers.

The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances.