As global markets sold off in March last year owing to the start of the pandemic, the reaction from investors was one of panic and a dash to cash.
Such a reaction places huge importance on retail funds having liquidity to cope with redemptions and, as has been seen with commercial property funds, not all can weather the storm.
Nearly 18 months on, we spoke to three fund buyers to see what liquidity measures they use and how they are employing these in current market conditions.
No second guessing
Ryan Hughes, head of active portfolios at AJ Bell Investments, says given he takes a long-term view towards asset allocation, he is not looking to second guess short-term moves in the market. As a result, he is not worried about keeping short-term liquidity in excess of what its long-term allocation model currently proposes.
“In our lower-risk portfolios we do hold some cash in money market funds and some short-duration gilts, but these are long-term, strategic allocations based on building the most efficient allocation possible based on expected returns, risks and correlations,” he says.
“In the higher-risk models, we naturally run with high exposure to equities and do not look to make short-term tactical calls around market levels as we don’t believe this is a predictable decision on a repeatable basis.”
However, Hughes adds that he does think about the liquidity of the underlying assets, which led AJ Bell to exclude physical property funds since the launch of its multi-asset portfolios more than three years ago.
“Overall, our focus is ensuring liquidity within the total portfolio is appropriate, but we are happy to operate on a fully invested approach over the long term.”
A contained threat
While central banks react to falling markets by flooding the system with liquidity, Chris Metcalfe, investment and managing director at Iboss, says liquidity issues overall should remain contained. The crunch, he adds, will come when an event occurs that investors feel is outside the control of central banks.
“The covid-19 outbreak gave us a brief but gut-wrenching glimpse of how fast markets can become illiquid,” he says. “Previous to that, in Q4 2018, the infamous Powell Pivot showed that markets are addicted to the central bank support and the threat of it being removed even slowly sent the markets into a tailspin.
“During this period of falling global markets, US stocks led by technology names suffered the most.”
Despite liquidity concerns, according to Metcalfe, Iboss has been reducing its cash holdings during the past 12 months.
“We have opted to increase our equity exposure at the margin, but at the same time we have expanded our short-dated bond holdings,” he says. “As a result, we have our highest weighting to short-dated bonds since launch in 2008. Except for sovereign bonds, these funds are one of the most liquid assets after cash.”
Metcalfe adds that the Iboss funds have also recently moved to their lowest sovereign bond weighting. “We believe the risk/return profile against the current macro backdrop and extreme uncertainty around inflation is very poor,” he says.
Liquid assets
As manager of a multi-asset range, Justin Onuekwusi, head of retail multi-asset funds at LGIM, says liquidity is always important and something he must keep on top of. Despite this, he claims that holding too much cash in the past 12 months would have been the wrong strategy.
“In February and at the start of March last year we did raise cash,” he explains. “Then towards the back end of March we started to deploy this cash back into markets and became a liquidity provider in what was a time of stress.”
By using the cash to add to high yield and credit exposure, the funds benefited significantly and it is a stance he is maintaining today. “We are still positive on risk, which means we have one of the lowest amounts of cash since the funds launched in 2013.”
This view could change, however, as the funds receive positive cashflows. He says the need to meet redemptions has been “ingrained in him for a number of years after seeing high-profile cases of investors and savers being restricted in getting their money out of funds”. To help him, Onuekwusi has plenty of tools at his disposal to keep liquidity in the funds.
“In a multi-asset portfolio there are lots of different ways to keep hold of liquidity,” he says. “There is straightforward cash or cash funds, or liquidity funds that tend to invest in short-dated paper and give you a little bit more additional yield.
“You also have short-dated versions of corporate bonds, gilts and government bond funds, all of which are good ways of keeping liquidity or making your cash work harder.”
This article is taken from the July/August 2021 issue of our sister publication Portfolio Adviser’s magazine. Read more here.
