Gearing Liquidity and Risk · Investment Trusts

The ability to trade a trust’s shares and the ability to sell its investments are separate. Future funding commitments add another layer that a cash balance alone may not reveal.

Separate the two markets

Share liquidity concerns the availability of buyers and sellers and the prices they will accept. Portfolio liquidity concerns how quickly the company can sell its assets without unacceptable loss. Exchange trading does not make a private factory or property instantly saleable.

A shareholder may be able to exit while accepting a wider discount. The company may still retain its assets. Conversely, a portfolio of traded securities can sit inside shares with limited market demand and a wide spread.

Add future cash claims

Private asset funds can make commitments that are drawn later. Suppose a trust has £12 million cash and £20 million of possible near term capital calls. Expected asset distributions may help, but they are not the same as cash already available.

Check the timing, legal terms and available financing. A portfolio can look well funded in a central scenario and become strained when exits are delayed while calls continue. Avoid simply netting uncertain expected receipts against firm obligations.

Create a cash stress schedule

List cash, genuinely available facilities and conservative expected receipts. Then list debt service, operating costs, commitments and planned distributions. Test delayed receipts and reduced sale proceeds.

The aim is to identify when action would be needed. A temporary accounting gain cannot pay a cash obligation. A sustainable funding plan must work with the assets and facilities that can actually be used.

Try it yourself

Available cash is £8 million. Confirmed obligations over the next period are £11 million and uncertain receipts are £5 million. Is the position automatically covered?

Show the worked answer

No. There is a £3 million gap before uncertain receipts. Assess their reliability and timing and identify committed alternatives.

Further reading

Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. This guide focuses on listed investment companies commonly called investment trusts in the UK. Product terms, access and tax treatment vary by jurisdiction.

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