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Special Report: Multiasset managers

Need for daily liquidity quashing innovation in multiasset strategies

Shoqat Bunglawala said there is real value in including private assets.

The perceived — and in some cases required — need for daily liquidity among some investors is holding back innovation in the multiasset space, sources said.

"It instinctively feels wrong that all of your best investment ideas would be readily realizable the day after you bought them," said Paul Berriman, global head of funds at Willis Towers Watson PLC in London. "If you can allow yourself as a defined benefit fund the opportunity to go monthly or quarterly … there is no guarantee of success but you do … have an increased universe of potentially interesting things" in which to invest.

As well as potentially hindering investment return prospects, daily liquidity requirements also constrain managers in terms of their investment opportunities.

"The biggest constraint these multiasset funds have is daily liquidity," said Sara Rejal, global head of liquid diversifying strategies at Willis Towers Watson in London.

While some retirement plans, such as defined contribution plans, need daily liquidity, "for other clients we don't think you should constrain yourself … you won't get fully robust, diversified" allocations, she said.

Sources at money management firms agreed that, where able to, they want to exploit an illiquidity premium by moving into less liquid assets.

"If you were completely unfettered in an multiasset approach, you would want to benefit from the illiquidity premium available," said Shoqat Bunglawala, head of the global portfolio solutions group for Europe, Middle East and Africa and Asia-Pacific in London at Goldman Sachs Asset Management. "We have within our risk budget an allocation to private assets; to the extent that a client affords us the opportunity to go into private assets, we think there is value."

However, he recognized that it is common among retail, wealth and some institutional clients to have a daily liquidity provision in investment rules.

"There the private asset component of the risk budget jut falls out — we reallocate across other sources of return, using strategies that are daily liquid," Mr. Bunglawala said.

Increasing area of interest

Neuberger Berman also is working with institutional clients to incorporate the illiquidity premium, where appropriate. Erik Knutzen, chief investment officer of multiasset class at the firm in New York, expects adding illiquid assets into portfolios to be an increasing area of interest for clients able to lock up their capital, as they "seek to evaluate just how much illiquidity they can stomach ... we can incorporate an element of tactical allocation, relative valuation and opportunistic investing to add a slice of illiquidity into (a) portfolio," he said.

Moving into less liquid asset classes is on the agenda for some multiasset investors, who recognize the benefits of exposures to real estate, infrastructure and other "real" assets. But they're also finding a need for new areas of investment within that real assets category.

"For a long time, multiasset products have been regarded as an important part of a portfolio as they can provide significant diversification via exposure to multiple asset classes and sectors as well as the flexibility to respond to changing market conditions," said Anthony Dalwood, CEO at alternatives manager Gresham House Asset Management in London. "However, simply holding a large number of asset categories does not provide true diversification, and investors are increasingly seeking to narrow their focus on specific asset classes to meet their investment objectives."

Until recently, he said, real assets such as infrastructure, real estate and agriculture "were seen as the answer … but returns found in these traditional real asset classes over the last 10 years have reduced. Investors are now on the hunt for new real assets to fill the gap and investments that were once seen as subasset classes," such as forestry and energy storage systems "are now being looked at in their own right," Mr. Dalwood said.

Consultants are talking to institutional clients about the potential for "multireal assets," said Guy Hopgood, senior associate, private markets at bfinance in London. "Some of the more traditional (diversified growth funds) did start including listed infrastructure, commodities, (real estate investment trusts) or some form of real assets in there; but it's trying to develop that opportunity set. It is relatively new — a couple of clients are looking at the sector."

However, bfinance executives said clients hold differing views on what constitutes a "real asset" allocation. One client, he said, was looking for real estate and infrastructure allocations, with some other real asset exposures. Another client wanted to exclude real estate and infrastructure from a real asset allocation, looking instead at agriculture, renewables, timber and transportation assets. "While there are (some strategies available) it is difficult because everyone has their own view around what it is. It explains why, within the marketplace today, the majority of managers (offering real assets) have started down the separately managed account route to give exposure," Mr. Hopgood said. "While there is increased conversation and chatter, the implementation side from an investor standpoint is really very difficult."