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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

Read more: liquidity cash

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 cash.

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 differently.

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 said.

"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.

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