By Peter Sherriff, Director of Product Strategy, APAC.
In part one of this series exploring the challenges and opportunities facing APAC asset owners, we discuss recent pandemic-driven liquidity issues and the tools that organizations are using to measure and manage this form of risk.
The sell-off in global equity markets witnessed during the initial response to the pandemic exposed a number of vulnerabilities facing APAC asset owners that were hardly conceivable prior. Australia, the world’s fourth largest collection of pension assets lost 7.7% in the first quarter of 2020 while Japan’s Government Pension Investment Fund shed 9.1% as examples.
In Australia, knock-on effects likely compounded the sell-off. When widespread quarantines resulted in sudden mass unemployment and government mandates permitted members to access retirement savings, superannuation funds responded by selling equities to raise cash.
With global interest rates at historic lows since 2010, asset owners found that government bonds and other “safe” investments no longer provided adequate returns to meet multi-decade insurance and pension liabilities. This forced organizations out further in the risk spectrum and into less liquid but higher yielding alternative assets such as real estate and infrastructure. The search for yield was also driven by growing regulatory costs and years of underperformance by the investment managers retained by asset owners to generate returns.
The recent market turmoil has drawn attention to deficiencies of liquidity sourcing assumptions in asset owner operating models. Reports of external investment managers refusing asset owners’ redemption requests have surfaced, exposing the unintended consequences of outsourced asset management in a liquidity crunch. Constrained liquidity is further complicated by the opaque and complex fund structures employed by many asset owners involving multiple external asset managers, sub-managers and pooled funds.
Understanding and managing these types of liquidity risks requires a timely, consistent and complete view of portfolio holdings and exposures across complex fund structures. Look-through and aggregation capabilities for both internal and externally managed assets serve as the foundation for generating actionable and accurate liquidity risk metrics.
Charles River’s strategy to provide the front and middle office with a single, open and integrated financial desktop offers an interactive, online alternative to traditional batch-based, periodic risk reporting mechanisms. Central to this is the integration with both incumbent and emerging risk analytics providers on our platform, providing choice and flexibility to asset owners looking for timelier views of exposure, risk and potential liquidity shortfalls. Our growing list of risk analytics providers includes MSCI, Qontigo, Northfield and truView®.
These tools provide asset owners with a range of portfolio insights and enable asset owners to independently validate their investment managers’ liquidity and generate time-to-liquidation measures needed to comply with regulatory reporting requirements
Aside from better-informed risk management, fund managers can incorporate projected asset liquidity constraints into portfolio construction and asset allocation decisions. Asset owners with the requisite data aggregation, look-through and risk analysis capabilities in-house can be well positioned to ride out the current market turmoil by making timelier, better informed portfolio de-risking decisions and plan for orderly asset liquidations to meet redemption requests. We think they are also better able to take advantage of the massive investment opportunities unleashed by the wave of central bank asset purchases globally.
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