Real assets | Feature
assets rather than just in public markets – and one is what happens to public markets as a result.” For Tomlinson, institutional investors need to understand – or at least address – where the “crash barriers” in financial markets are in 2019 and how they are functioning. There is some evidence for this concern. In December, on the back of some painful, if not unreasonable, economic data from the US, global stock markets crashed, wiping out much of their gains for the year. With fewer players in the game, and those players being less willing to take market risk or get involved on a day-to-day or even moment-to-moment basis, it makes sense that liquidity has dried up somewhat. World Federation of Exchanges’ (WFE) figures show that the number of stocks traded in the US, which is a proxy for global liquidity, fell 30% in the decade to the end of 2018. This figure is reflected globally, too, and may give evidence of fewer people operating in the market. “Now, in a systemic dislocation, where does the stabilisation capital come from?” Tomlinson asks. “Bank prop
desks are
largely gone, hedge funds, which have around $2tn, may be able to play, but what about institutional investors? Might they be willing to deploy capital in scale and at interesting pricing?” But if their assets are already allocated to the billions in illiquid assets, it might not be possible. Collie at WTW says that institutional inves- tors had not traditionally been cast in this “buyer of last resort” role, but as other sources of liquidity leave, some have con- sidered asking them to step in to provide it. “It is happening as asset owners are more willing, but it is slow. It has been able to happen as investors have become more dynamic in how they allocate assets. No longer is it a stationary 60/40 split.” However, Collie highlights another ques- tion around whether these investors would be the right choice at all.
This is something that Tomlinson and Wade have addressed.
As LPP builds out an internal team, it is tar- geting people with the skill set and experi- ence of working in multiple complex envi- ronments who would be able to deal with and potentially exploit a sudden downturn. Wade, too, says that SAUL would be equipped dive in if there was a crash and put capital to work from the side-lines. He says that several market participants had warned that liquidity levels were not at the same levels as they were a decade ago. With a 50% allocation to liability-driven investments, SAUL also has to manage its liquidity to ensure its collateral can back this complex mechanism. Being nimble in the event of market shocks is key. “If a crash looked likely, we would swap out of our active equity programmes and into futures and total return swaps,” Wade says.
of 2008, the number has dropped almost 36%, a figure echoed around the globe, according to WFE. Whether this move by companies has been the chicken or the egg for investors moving out of public market and taking some liquidity with them is almost a moot point – the shift is happening and investors must be ready as the waves of volatility have returned to a much shallower pool of capi- tal. And as these waves return, just having an immovable object or real asset might no longer be enough. “We are planning for a rainy day, so we can try and avoid being forced into any kind of fire sale,” Tomlinson says. “We want to be a provider of liquidity, not a demander of it. We want to be able to use our edge as a sophisticated long-term investor and our large, stable balance sheet in the event of something significant.”
Issue 84 | May–June 2019 | portfolio institutional | 33
“Using Richard Bookstaber’s analogy that a shopkeeper would not reduce the price of a loaf of bread if it does not sell within 20 seconds of going on sale, when markets crash, it takes time for all investors to come in to buy,” Collie says. Institutional, long-term investors may wait for a better price, which may make the situ- ation worse and “act as a deterrent from them stepping in to provide liquidity”, Col- lie says, adding that for the moment, there are still plenty of liquid assets available. But the main limiting factor is more about whether they have governance structures that allow and enable them to step in to pro- vide liquidity, Collie says.
“This way, we would not lose exposure, but have more available for collateral purposes.” Governance structures as developed as those run by LPP and SAUL may be vital in the near-term, as investors become forced to think further about non-listed assets. “If the number of listed companies keeps coming down – as it is in the UK and the US – investors will have to find new ways of accessing the economy and private markets are one way to do it,” Collie says. In the 16 months to the end of April 2019, the number of companies listed on the London Stock Exchange dropped 3%, according to official figures. Since the start
There are different risks that come into play
by investing in illiquid assets rather than just in public markets – and one is what happens to public markets as a result. Richard J Tomlinson, Local Pension Partnership
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