Most market participants have an awareness of liquidity and it is well understood that liquidity deteriorates as you go down the market capitalisation spectrum. The time taken to invest and the market impact means the unit size of investment has a significant effect on the subsequent investment outcome. We firmly believe that having a relatively small unit size of investment represents a material competitive advantage.
The issue of liquidity is increasingly pertinent. The professionalism of fund selection has resulted in some significantly sized UK smaller company funds. There are only three options for these funds: invest in mid-cap companies, take bigger stakes in existing holdings (sometimes squeezing valuations); or lengthen the list of holdings (which reduces active share). None of these alternatives serve the investor well in the long term and the data demonstrates that these approaches ultimately erode returns.
Most people will agree that the outlook for investment returns is lower than in recent times. Most will also agree that despite the lack of recent volatility, the balance of probability is that there will be events that will lead to a re-appraisal of where value sits in the market.
Teviot is a vehicle that aims to minimise the drag of liquidity on investment returns and has the flexibility to respond to investment opportunities.