Outlook 2021: Liquidity and asset diversity to test instos

After a year of violent market swings, investors such as New Zealand Super expect more liquidity stress next year and are preparing accordingly.
Outlook 2021: Liquidity and asset diversity to test instos

Uncertainty about the potential impact of Covid-19 on capital markets and economies in 2021 is forcing asset owners to prepare for more liquidity stress and seek out the best ways to diversify their credit and real asset investing. New Zealand Super Fund is one. 

“There are recessions emerging in many economies, including Australia for the first time since 1991, and massive volatilities in markets,” Paul Newfield, director of sector research at Melbourne-based asset consultancy Frontier Advisers, told AsianInvestor.

Liquidity stresses will likely continue into 2021 but asset owners will face the bigger problem of valuations, he said. “The challenge for asset owners will be how to ensure valuations for unlisted assets are updated, to ensure equal treatment among different member and investment cohorts when transacting during volatile times.”

Paul Newfield, Frontier

The liquidity issues that persist will likely be around investors’ inability to easily exit certain investments, as unlisted vehicles extend their liquidity lock-in periods, he added.

Managing liquidity has certainly been vital for NZ Super, after a year in which its assets swung from NZ$46 billion ($32.84 billion) at the end of December 2019 to NZ$35 billion at the end of March to NZ$51 billion now.

"That’s a massive amount of volatility for us to deal with, so managing our liquidity is vitally important,” said Matt Whineray, chief executive of the sovereign wealth fund.  


Stephen Gilmore, chief investment officer of NZ Super, admitted that liquidity management had proved challenging during the early days of Covid-19. 

“[The impact of the pandemic on markets] highlighted to me the need to do a bit more work in communicating links between risk budgeting frameworks and [market] liquidity,” he told AsianInvestor.   

“With the Covid shock we had raised liquidity and needed to deploy it in an effective way … [which] through the reference portfolio and credit mandates was extremely valuable, but for others we couldn’t do it as nimbly [as they became less liquid than expected].”

In addition, the 2020 Covid-related recession caused credit spreads to widen.

“Rapid and substantial central bank intervention made this an exceptionally short-lived phenomenon, however, leaving investors with a highly complex mix of early- and late-cycle characteristics, and default and valuation risks,” said Brad Tank, CIO for fixed income at US fund house Neuberger Berman.

“We think this demands a flexible, go-anywhere approach to credit,” he added.

Matt Whineray, NZ Super

However, the latest conditions may also offer some targeted areas of opportunity. Whineray told a stakeholder meeting at New Zealand's Parliament earlier this month that the fund had "some strong capabilities" on the credit side. "We have some internal credit mandates, where we’ve looked to increase the active risk," he added. 


Direct investments will also form a key part of asset owner planning in 2021. Opportunities for the coming year and beyond include certain pockets of unlisted property in areas such as healthcare and housing, and in certain overseas markets.

“Niche areas within infrastructure” will also provide opportunities, Newfield said.

He added that clients were also increasingly looking at hedge fund and derivative strategies, “which served some clients very well in 2020 in reducing the scale of their drawdown", as well as certain areas of specialist credit.  

NZ Super has found that direct investing in its home market has become more challenging, because opportunities are not growing as fast as its assets. Whineray said infrastructure was an obvious avenue, while the fund has also invested in agriculture and small and medium-sized enterprises.

“But they don’t really move the dial when you’re looking at a $100 billion fund," he said. "So increasing our capability in real estate and infrastructure is a way we can continue to meet our mandate.”

Whineray also identified investment data as a big challenge for 2021.

"With a portfolio that includes 6,000 global equities and a whole bunch of global bonds," he said, "how do you make sure you’ve got the right risk management and the data to inform the decisions you’re making? How is that changing from day to day? What is your liquidity position and how do we manage that as we move from NZ$50 billion to NZ$100 billion in assets under management?

"So, data is a big focus for us in the next two to three years.”

Richard Morrow contributed to this article. 

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