Allocators rediscover an appetite for less liquid assets

The struggle to find yield from the most liquid assets is leading fund managers and asset allocators to consider different types of liquidity in their portfolios.

Allocators agree on one thing: the most liquid assets fail to help them pay their liabilities and living costs. Cash and debt yields that are near or even below nil are largely useless as investments.

As allocators question how they will pay their bills, there are signs of renewed interest in less liquid asset classes. Alexander Schindler (pictured), member of the executive board responsible for business with institutional clients at Union Investment, says the gap between returns and liabilities is “set to become a major headache for German insurance companies and pension funds. Most portfolios are overweight in sovereign debt. You have to move them out of the public sector.”

Some are already shifting to less tradeable assets, while others are considering moving. But all note important caveats to rotating, including liquidity-matching, and regulation, perhaps the largest hurdle.

Simon Greaves, managing director in Duff & Phelps’ London office and leader of its complex asset solutions practice in Europe and Asia, says: “Interest is coming back for the same reason people were interested in the first place – they are becoming more yield-hungry.”

Interest is not confined to Europe. Roger Bacon, managing director, head of managed investments Asia Pacific at Citi in Hong Kong, says: “We are seeing a lot more action on the illiquidity spectrum”.

Many UHNWI and institutional investors that his team caters for do not fear illiquid assets, if they know these cannot be traded readily.

Liquidity ‘barbell’

Many approach liquidity as a ‘barbell’, he says. Some allocations go to private equity, for xample, and on the other side to liquid, readily tradeable instruments. Any enthusiasm is a world away from 2008-09. Then, investors globally fled to liquid cash and bonds, almost regardless of returns.

Philip Kalus, co-founder of European fund placement agents Accelerando Associates, says: “Liquidity was king, and if you were coming out with monthly liquidity [products], people said, ‘forget it, we want daily or weekly’. The liquidity light was switched off. “But then early this year, it was like someone switched that light back on. Many investors say now, in order to achieve the risk/return profile they are targeting, they have to accept more limited liquidity.”

Kalus says painful volatility of liquid markets helped. “There is so much pressure to meet their liabilities and objectives, and in the short term that is so hard with market volatility so high.”

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