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Supertanker funds: liquidity issues in shallow waters

by Jonathan Beckett on Mar 07, 2014 at 11:31

Supertanker funds: liquidity issues in shallow waters

Rewind a decade and any fund over £1 billion was considered big news, but today referring to them as ‘supertankers’ seems almost banal.

Indeed, the game has moved on as market capitalisation has grown multiple times and we have had to adjust what ‘big’ means.

Now the biggest home-grown strategies such as Standard Life Investments’ Global Absolute Returns Strategies (Gars) are north of £50 billion (across various markets), and even equity income strategies such as Neil Woodford’s peaked at over £35 billion before he announced his impending move to Oakley.

As a fund market we have never really got used to super-sized funds, yet in the last five years we have thrown our assets increasingly at a smaller number of funds.

Growing up in the 1970s, my father was an engineering officer in the Merchant Navy so I was used to various anecdotes about his life at sea and what supertanker leviathans were like to control.

He worked on the very largest supertankers of the day, known as ‘very’ and ‘ultra large crude carriers’ and supertankers have never been quite so large since.

I was reminded of his stories when I first started to use the term ‘supertanker fund’ to describe the rise of the many multi-billion funds (in excess of £5 billion or even £10 billion) that have become commonplace today.

If we liken funds to ships, then the largest would most certainly resemble the largest supertankers or crude carriers. If this analogy holds, then the biggest risk for these funds is ‘draft’ and ‘shallow water’. Let me explain.

Draft risk

Draft is the naval term for how deep a ship’s hull sits in the water. When supertankers are fully laden they sit very deep in the water and draft creates drag which has a bearing on how ships handle in different depths of water. Supertankers have long struggled with navigating shallow water, especially when carrying large loads.

The main problem is one of size as supertankers were built with cost rather than nimbleness in mind.

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