The massive Covid-driven market turmoil this year has shown that there’s no such thing as too much portfolio stress testing and in the deepest crises even the most frequently traded listed assets can become illiquid.

These were among the opinions voiced at an event last month by Jeffrey Jaensubhakij, group chief investment officer of Singapore sovereign wealth fund GIC, and Alain Carrier, London-based head of international at Toronto-based retirement fund Canada Pension Plan Investment Board (CPPIB).

Such opinions count. The two institutions are estimated to manage at least $800 billion of assets between them and have decades of experience of investing globally across the full range of asset classes.

Jeffrey Jaensubhakij, GIC

“Every time we have a crisis [now], we're shocked by how liquidity dries up even in the public markets when you need it most,” said Jaensubhakij at the Greenwich Economic Forum on November 11.

Since the global financial crisis (GFC) in 2008, some institutions – most notably banks – are less able or willing to participate in the markets. As a result, he said, “we've seen even the most liquid markets, like [US] Treasuries, become much less liquid, and then in times of crisis, you can't really move much paper at all.”

Jaensubhakij highlighted lessons he has drawn from such developments.

Even with listed assets, it makes sense to take the view that they may need to be held to maturity, he said. “If you're trying to trade in and out of assets with the expectation that liquidity will be there, I think it's a more dangerous game than it's ever been before.

“We're almost forced, even in publicly traded assets, to take a longer-term view, almost as with private markets... about whether we can hold it for a longer period,” Jaensubhakij said.

CPPIB’s Carrier echoed such thinking, underlining the importance of taking a five- or 10-year investment view while also retaining some liquid assets. He also pointed to the importance of stress testing, and how this year’s crisis had vindicated the time the Canadian pension fund had spent on such activities.

Alain Carrier, CPPIB

“After the GFC, that was one of the core strategic goals we had internally – to make sure that we keep on testing, on a recurring basis, the ability of our portfolio to withstand a shock,” Carrier said.

“Probably some people at some point were saying: ‘We're spending way too much time trying to test the resilience of our portfolio’. But it turns out that actually, it worked really well.”

The public fund had allowed for potential volatility in different markets and geographies and assumed it might not be able to receive capital from the provincial government or from portfolio companies, Carrier said.

“We had different scenarios that we ran over a long period of time that were quite varied and very robust in testing the resilience of the portfolio,” he said. “What we had not anticipated is that all this economic shock would happen in such a tight window – it manifested itself so quickly.”

Global equities, as measured by the MSCI All Country World index, plunged 31% in a month from February 20, but by August 25 had recovered all their losses and as of December 4 were up 12% since the start of 2020.

CPPIB was conservative in managing capital in the early part of the pandemic crisis, he added, and has emerged “in very good shape”.

“That, to me, is the positive lesson: that the work was definitely not in vain,” Carrier said. “If anything, we could probably have run a few more scenarios.”