Managing Liquidity in an International Investment Portfolio

Liquidity: The Foundation of Financial Security

In investment theory, illiquidity is compensated with higher returns — the illiquidity premium. In practice, the failure to manage liquidity carefully is one of the most damaging mistakes internationally mobile investors make.

An investor with a beautifully constructed 10-year portfolio — diversified across private equity, real estate, infrastructure, and growth equities — faces a serious problem if they unexpectedly need £200,000 at six months' notice. The private equity fund will not return capital; the property will take months to sell; the infrastructure investment trust may be trading at a discount; and selling the only truly liquid assets (equities and bonds) at the wrong time may crystallise losses and undermine the long-term strategy.

Liquidity management is not about being excessively conservative or holding excessive cash. It is about understanding how much capital you genuinely might need, over what time horizon, and ensuring that an appropriate amount is accessible within that timeframe.

For internationally mobile investors — who face currency needs, unexpected international expenses, and potentially changing personal and professional plans that require capital flexibility — this analysis deserves more attention than it typically receives.

The Liquidity Spectrum

Investment assets range across a wide liquidity spectrum:

Immediately liquid (hours):

• Bank current and savings accounts.
• Money market UCITS funds (same-day or next-day redemption).
• Physical cash.

Short-term liquid (days):

• Listed equities (settlement T+2 in UK/EU markets).
• Government bond ETFs.
• Short-dated government bonds.
• Major corporate bond ETFs.

Medium-term liquid (days to weeks, some caveats):

• Active UCITS funds (typically daily dealing, 1–5 business days to settle).
• Listed closed-ended investment trusts (share price may differ from NAV; need to sell in market).
• Listed infrastructure and alternative investment trusts.
• Offshore investment bond (accessible through surrender process, typically 5–15 business days).

Conditionally liquid (may be gated):

• Open-ended property funds (daily dealing under normal conditions; may gate in stress).
• Some alternative UCITS funds with liquidity buffers.
• Semi-liquid private credit evergreen funds (quarterly redemption windows, subject to gates).

Illiquid (locked up):

• Private equity funds (5–10 year life; no redemption during life except via secondary market).
• Private credit closed-ended funds (5–8 year lock-up).
• Closed-ended infrastructure funds (8–12 year lock-up).
• Direct property (months to sell; transaction costs 3–6%).
• Farmland and forestry (months to sell, specialist buyers only).

The Bucket Approach

The bucket approach structures a portfolio explicitly around liquidity needs and time horizons, ensuring that each category of need is met from an appropriately liquid source.

Bucket 1: Immediate and Short-Term (0–2 Years)

Contents: cash deposits, money market funds, short-dated government bonds.

Purpose: cover 1–2 years of living expenses, known upcoming commitments (tax bills, property purchase deposits, school fees, scheduled travel), and an emergency buffer for unexpected large expenses.

Sizing: at least 12 months of total annual spending (including all commitments), typically 18–24 months for internationally mobile clients who face multi-currency demands.

Management: held in accessible bank accounts, ideally in multiple currencies matching spending needs. Money market UCITS funds provide a marginally higher yield than bank deposits while maintaining immediate accessibility.

Bucket 2: Medium-Term (2–7 Years)

Contents: investment-grade bond funds, balanced income funds, listed multi-asset strategies, short-duration alternatives.

Purpose: provides a buffer between the immediate cash bucket and the long-term growth portfolio. Capital here is invested (earning a return) but in lower-volatility assets that can be converted to cash within a few weeks if Bucket 1 is depleted.

Sizing: typically 3–5 years of anticipated needs above Bucket 1.

Management: rebalanced periodically; refilled from Bucket 3 growth assets during strong market periods.

Bucket 3: Long-Term (7+ Years)

Contents: global equities, alternatives, private markets, real assets, infrastructure.

Purpose: the engine of long-term capital growth and real return generation. This capital is not expected to be needed within 7 years, giving it time to recover from market downturns, private equity J-curves, or illiquid investment periods.

Sizing: the remainder of investable assets after Bucket 1 and Bucket 2 are funded.

Management: most aggressively invested relative to risk capacity; includes illiquid positions whose lock-up periods are comfortably within the time horizon.

Lock-Up Risk: Lessons from Gated Funds

The most dangerous liquidity risk for internationally mobile HNW investors is over-allocating to illiquid or conditionally liquid assets without stress-testing the consequences.

UK Property Fund Gates (2016, 2019, 2020)

Several large UK commercial property funds offer daily dealing — investors can, in theory, buy or sell units at the fund's net asset value on any business day. However, commercial property is inherently illiquid (a property takes months to sell), and these funds maintain only a modest cash buffer to fund routine redemptions.

When redemption requests exceed the cash buffer, valuers may suspend their normal property valuations (as occurred in 2016 post-Brexit vote and in 2020 during COVID-19) — triggering automatic gating provisions. Investors who needed to access capital were unable to do so for months.

The lesson: daily-dealing property funds are not truly liquid investments. They carry gate risk — the risk that the normal liquidity mechanism is suspended precisely when markets are most stressed and your need for capital may be most acute.

Neil Woodford Equity Income Fund (2019)

The Woodford Equity Income Fund — once one of the UK's most popular retail investment funds — suspended redemptions in June 2019 after a period of underperformance prompted significant investor withdrawals. The fund had accumulated positions in illiquid, unquoted companies that could not be sold quickly to fund redemptions.

The fund was eventually wound down, with investors receiving back a fraction of their original investment after a lengthy liquidation process. The lesson: investment funds that claim daily liquidity but hold illiquid underlying assets carry liquidity mismatch risk — particularly when investor confidence is low.

Liquidity Across Multiple Currencies

Internationally mobile investors typically have needs in multiple currencies: expenses in their country of residence, property or lifestyle costs in countries where they have connections, school fees or family support in home currency, and investment portfolios denominated in sterling, USD, EUR, or other currencies.

Managing multi-currency liquidity requires:

Multi-currency bank accounts: Maintaining current accounts or instant-access deposits in each currency of meaningful expenditure. Major international banks — HSBC International, Barclays International, Standard Chartered, Citibank Private Bank — provide multi-currency banking for internationally mobile clients.

Currency conversion timing: Converting currencies on an ad hoc basis as needed exposes the investor to the spot exchange rate. For predictable large currency needs (annual school fees, property purchase deposits), forward FX contracts can lock in today's exchange rate for future delivery — reducing the risk of unfavourable rate movements.

Separating functional currencies: Identify your primary "functional currency" (the currency in which you think about your expenses and wealth), and ensure Bucket 1 is primarily held in this currency. Secondary currencies should hold amounts proportionate to their role in your expenditure.

Repatriation considerations: Moving capital across borders may involve timing delays, transaction costs, and in some jurisdictions, regulatory reporting requirements. For internationally mobile investors who may need to repatriate capital from an investment jurisdiction to a spending jurisdiction, building in additional lead time (3–6 months) for significant capital movements is prudent.

The Liquidity Budget: What Does Your Portfolio Actually Need?

A practical liquidity audit for an internationally mobile investor might cover:

Committed near-term expenses:

• Annual living costs (all countries combined) × 2 years.
• Known upcoming large payments (property completion, tax bill, school fees x 3 years) × 100%.
• Contingency for unexpected events (medical emergency, legal situation, family emergency): reasonable provision based on circumstances.

Potential investment commitments:

• Undrawn private equity capital calls (private equity funds draw capital over 3–5 years; future calls must be funded from liquid assets).
• Options or property deposits at risk.

Total liquid requirement: Sum of the above — this is the minimum to hold in Bucket 1 and 2 combined.

Appropriate illiquid allocation: Total portfolio minus liquid requirement. Any allocation to illiquid assets (private equity, direct property, closed-ended infrastructure) should come from this remainder, with a further safety margin.

Stress-Testing Liquidity

Before committing to any illiquid investment, it is worth stress-testing the portfolio under adverse scenarios:

• Market crash scenario: Equities fall 40%, property falls 20%, illiquid investments are locked up. Can you fund 2 years of expenses from Bucket 1 without selling anything?
• Personal emergency scenario: You need £500,000 within 6 months for a significant unplanned event. What can be liquidated and at what price?
• Opportunity scenario: An investment opportunity requires £300,000 at short notice. Is there capital available without disrupting the long-term portfolio?

If any of these scenarios creates a critical problem, the portfolio has too much illiquidity relative to its liquid reserve.

Managing Liquidity in the Offshore Investment Bond

Offshore investment bonds provide a useful liquidity feature through their 5% annual withdrawal allowance — investors can access up to 5% of the original premium each year without triggering an immediate tax charge. This provides a predictable annual liquidity mechanism for investors who need to draw from the bond.

However, the bond's overall redemption process takes 5–15 business days from request to receipt of funds — it is not immediate. For genuine emergencies requiring same-day or next-day cash, the bond is not appropriate as Bucket 1 capital. It sits at the liquid end of Bucket 2 for most purposes.

How Global Investments Can Help

At Global Investments, we help internationally mobile HNW clients build portfolios that balance return generation with genuine liquidity management — ensuring that the pursuit of illiquidity premiums in private markets never compromises the client's ability to meet near-term needs or respond to unexpected events.

We construct explicit liquidity budgets as part of our portfolio construction process, stress-test portfolios against adverse scenarios, and advise on multi-currency cash management strategies appropriate to each client's residency, spending pattern, and investment horizon.

To discuss liquidity management as part of your international wealth strategy, contact our advisory team.

Capital is at risk. Illiquid investments may not be realisable at short notice and their value can fall as well as rise. Open-ended funds offering daily liquidity may suspend redemptions in stressed market conditions. Past performance is not a reliable indicator of future results. This article is for information purposes only and does not constitute personalised financial advice.