Daily liquidity is a cornerstone of the investment policy of most professional investors managing retail money. The Ucits, daily liquidity format has therefore become their default product choice. Is too rigid an approach, as investors consequently are missing out on a range of investment options that offer attractive illiquidity premiums and diversification benefits?
“Let me tell you about one of the biggest high-yield bond managers in the world, whom I know very well,” says Jeroen Vetter, a fund consultant based in the Netherlands.
“Five years ago, he told me he was seeing so many inflows he just didn’t know what to buy, and this is still the case. But the [liquidity] problem starts when people start to redeem. Investors have a tendency to all redeem at the same time. So who will buy when this happens? That’s going to be a problem.”
According to Vetter (pictured), investors are wrong to place so much importance on liquidity. When investors need it most, daily liquidity is a fallacy, he contends.
Jaap Bouma, a senior portfolio manager at Dutch wealth manager Optimix, takes issue with that. After all, daily liquidity is vital for him to optimally perform his task as portfolio manager. “We always tell our clients we are the managers for the liquid part of their portfolio, and we won’t adjust in that respect.”
Liquidity mismatch
Disposing of liquidity requirements altogether would indeed be a bridge too far for most investors, as liquidity demand is there for a reason. But it’s fair to say there probably is a “clear mismatch between investments that are good for the clients and the vehicle that’s being demanded which is daily liquidity”, as Vetter puts it bluntly.
Institutional investors in the Netherlands have already started to invest more in illiquid assets. Dutch pension funds, for example, have entered the commercial mortgage market in the Netherlands. Investing in private loans is also on the increase.
Wealth managers in the country are following suit. “Our clients, who have investable assets of more than €5m, have no daily liquidity needs and can afford to take on some illiquid investments,” says Wouter Weijand, CIO of Dutch wealth manager Providence Capital.
“Lowering your liquidity requirements opens up lots opportunities in infrastructure and real estate, which can replace fixed income investments because these don’t offer value anymore. Yields have vanished,” he adds.
