Liquidity Is Not a Footnote

Liquidity is often treated as an implementation detail, assumed rather than examined. For many charities, investment portfolios are labelled “liquid” almost by default, with the expectation that assets can be realised whenever required, whether to fund services, grants or projects when promised. Recent experience suggests that assumption deserves challenge.

Market drawdowns, bond market stress, rising cash demands and greater scrutiny of restricted funds have all exposed a widening gap between perceived liquidity and liquidity that is genuinely usable in practice. Recent examples include:

• Market drawdowns (Q1 2020 – COVID-19 shock): Global and UK equity markets fell sharply within weeks, forcing many charities to reassess drawdown plans at precisely the wrong time.
• Bond market stress (Autumn 2022 – UK gilt crisis): Rapid rises in gilt yields following the mini-Budget led to severe price falls, impaired liquidity and forced selling across UK bond markets.
• Rising cash demands (2022–2024 – cost-of-living pressures): Higher demand for charitable services, rising wage and energy costs and volatile donation flows increased reliance on portfolio-funded expenditure.
• Greater scrutiny of restricted funds (Post-2019 – regulatory and audit focus): Increased emphasis on the proper use and availability of restricted reserves exposed gaps between apparent portfolio liquidity and funds that were operationally accessible.

Several pressures have converged over the past decade. Drawdowns have become higher and less predictable as charities rely more heavily on portfolios to support day to day activity. At the same time, operational cash needs have risen, just as market volatility has increased. Periods of market stress, particularly in gilts and bond markets, have demonstrated that assets can be liquid in theory yet slow, expensive or impractical to sell when cash is actually required.

Liquidity risk tends to crystallise precisely when markets are under pressure. This is the worst possible moment to discover that access to capital is slower, more costly or more constrained than expected.

Liquidity is not simply a question of whether an asset is listed or unlisted. In practice, it has three distinct dimensions. Speed, how quickly cash can be raised. Certainty, whether assets can be sold at all in stressed conditions. Cost, the price impact of selling at short notice. Assets that appear liquid in normal market conditions can behave very differently during periods of dislocation.

A common disconnect exists between portfolio construction, which often focuses on long term risk and return, and operational reality, where cash is needed on specific dates and for specific purposes, sometimes at short notice.

Operational cash needs are often the least visible yet most immediate source of liquidity risk for charities. Unlike long term investment objectives, operational requirements are driven by payroll cycles, grant commitments, supplier payments and service delivery obligations that cannot easily be deferred. These cash flows are typically time specific and inflexible, particularly for charities delivering frontline services or operating within contractual funding arrangements. Where portfolios are relied upon to support these needs, liquidity must be assessed by the certainty and timing of cash required to keep the organisation operating day to day, rather than in abstract terms.

For Finance Directors and trustees, this raises some fundamental questions:

• What level of drawdown must the portfolio reliably support?
• Over what time horizon must cash be delivered?
• How sensitive are operational plans to market timing and volatility?

A portfolio designed for long term growth may still be wholly inappropriate for short term funding needs if liquidity has not been mapped explicitly. Investment Committees should be cautious about relying on historical assumptions around bond market behaviour when assessing liquidity resilience.

Even within public markets, liquidity can be impaired by a range of factors, including concentrated holdings, daily dealing fund gates or suspensions, settlement delays, the disappearance of market depth during periods of stress, and correlated selling across portfolios. Liquidity therefore needs to be assessed at the portfolio level, not asset by asset.

The greatest liquidity risk is often one of timing mismatch. Where drawdowns are required during market stress, with little flexibility to defer, portfolios must be structured to deliver cash when it is needed, not simply over the long run. This requires explicit planning rather than assumption.

Good governance now demands that charities stress test liquidity in the same way they stress test investment risk. This should include scenarios where markets are disrupted, assets take longer or cost more to sell than expected, drawdowns are required during periods of stress, and operational funding commitments remain unchanged, exposing timing gaps between available capital and cash required.

• Delayed market access: assets take longer to sell than expected due to market disruption, settlement delays or fund restrictions.
• Forced sales: assets must be realised during market stress, crystallising losses or higher than expected transaction costs.
• Funding gaps: drawdowns are required before cash is available, particularly where income is delayed or expenditure cannot be deferred.
• Restricted capital: a material portion of the portfolio is legally or practically unavailable due to fund restrictions.
• Correlation risk: multiple assets become illiquid or fall in value at the same time, reducing diversification when it is most needed.

Practical liquidity planning frameworks

Effective liquidity planning typically includes clear segmentation of assets by time horizon, defined liquidity buffers, agreed protocols for accessing capital in stressed conditions, and regular review as drawdowns, markets and funding structures evolve.

Above all, liquidity should be treated as a strategic decision, not a technical afterthought. It is not about maximising cash holdings or avoiding long term investment risk. It is about ensuring that capital is available, usable and reliable when the charity needs it most.