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Funds urged to “future-proof” investments to avoid liquidity conundrum
23 January 2017
Low interest rates and regulatory changes focused around liquidity have affected many institutional investors
Pension funds should "future-proof" their investment
policies to ensure a balance of security, liquidity and yield,
say experts at Northern Trust.
Writing in a new whitepaper, executives from the US custody
bank’s institutional investor unit recommend asset
owners "shift their approach" when it comes to managing
Maintaining a "liquidity ladder" and considering future
calls on cash, stress testing liquidity profiles and
determining optimal short and long cash positions are all
suggested by the firm.
The steps would help asset owners manage what Northern Trust
describes as a "liquidity conundrum".
Low interest rates and regulatory changes focused around
liquidity have affected many institutional investors
Mark Austin, institutional investor group, Northern Trust,
said pension funds are coming under the "greatest pressure" as
a result of a confluence of these factors.
"For the majority of defined benefit schemes closed to new
members and in net decumulation, finding and maintaining
appropriate liquidity is vitally important and is becoming
increasingly challenging with many schemes across Europe
struggling to balance liquidity while creating returns," he
"Cash is an important investment-enabler - pension funds
cannot earn from it but cannot invest without it.
However, as the available liquidity in the market tightens and
returns on cash positions are reduced, pension funds can no
longer be passive about cash", he added.
Penelope Biggs, head of the bank's institutional investor
group in, Europe, Middle East and Africa, warned that there is
no "magic solution" to the problem.
However, she believes that understanding a portfolio from
the point of view of how liquid it might be at any point in
time is critical, particularly as the cost of cash liquidity
will only continue to increase.