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How funds are balancing the liquidity versus returns dilemma
Institutional investors are still concerned about liquidity within their portfolios and are adopting new approaches to modify their asset allocation, according to a paper by State Street.
The paper, part of the firm’s Vision Series of thought leadership reports, says the continued volatility of markets has led to the identification of weaknesses in investment portfolios.
The problem is, of course, balancing liquidity with returns. On the one hand funds are looking to increase further their allocation to bonds and other credit for liquidity purposes and on the other hand they are looking to increase their allocation to alternatives to bolster returns. Alternatives tend to be less liquid than bonds.
Interestingly, the investors who took part in the survey overwhelmingly remained in favour of the “endowment model” of investing, which also involves utilising a lot of alternatives.
They were doing more vigorous stress testing, however.
At an operational level, data integration remains a top challenge, the paper says.
“Nearly half of respondents cited challenges with achieving a comprehensive analysis of their portfolio and two-thirds expect their data management needs to increase over the next three years,”
The full paper, called ‘The Asset Owners’ Perspective: Evolving Investment and Operational Models’, can be accessed at: www.statestreet.com/vision.
