Fund Spy

No One Way to Assess a Fund's Liquidity

Benjamin Joseph, CAIA

Takeaways

  • Liquidity is best assessed by looking through multiple lenses at multiple angles.
  • Liquidity’s primary dimensions are size, time, cost, and resiliency.
  • To assess a portfolio’s liquidity, investors should look at the fund from an investment process perspective relative to its investment universe and not to a broadly defined market.

What Is Liquidity?
In “Cash Is Not Always King,” I explained why a fund’s cash allocation can’t be the only criteria used to assess mutual funds’ liquidity. If cash is always helpful to meet redemptions, relying exclusively on cash to pay investors back is an active decision that has a direct impact on a portfolio, increasing its concentration. When cash has been used and the most liquid positions have been sold, a fund becomes concentrated in its most illiquid investments and vulnerable to any pressure on both its assets (volatility and sell-offs) and its liabilities (redemptions).

Benjamin Joseph, CAIA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.

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