I’m not sure if I have ever believed in the notion of an illiquidity premium. Mark Wilgar, Cambridge Associates


It’s only through collective funds that most of us can get the spread of risk and diversity we want. As schemes consolidate in defined benefit (DB) and DC there will be an increasing trend for pension schemes to appoint their own chief investment officer and when that happens there may well be a true peer-to-peer market where the user of capital goes straight to the provider of capital. Halfon: The role of an asset manager is evolving. At one point, a pension scheme’s in-house team did most of the work but now asset managers are evolving to become part of a scheme’s trusted adviser group. Pension schemes don’t necessarily feel confident or comfortable doing everything themselves anymore. There is a need for a chief investment officer to be the link between the investment strategy, the investment guidelines, especially in our ESG-conscious envi- ronment, and the external world. It’s also part of the overall governance improvements. Schemes’ are becoming cash-flow negative and cannot afford mistakes, so they are working closely with consultants and asset managers. Everybody is getting closer. We have seen this evolving very fast in more specialised segments of the investment universe, such as direct lending. In the past you would almost exclusively invest in listed securities and could check the prices on Bloomberg or Reuters, making it easier to meet any governance requirements. It is less the case now with unlisted


10 March 2020 portfolio institutional roundtable: Fixed income


prices where there is a component of art on top of the science. Cielinski: It is hard to see this move toward illiquids going away. Part of the reason is low rates and part of the reason is that too many people are paying excessively to over-own liquid assets. That is an insurance policy most people don’t need. Directly lending to smaller companies with higher costs of capital and thinking that there won’t be a risk event is a mistake. This trend, whilst is not going away, is not a free lunch. As the cycle matures, a lot of the companies borrowing money will prove to be troubled credits. We will see that in the next cycle. Credit risk is always there, that part hasn’t changed, but it’s hard to see a shift in the trend towards looking for more yield and giving up a little bit of liquidity, because most of us don’t need it. Halfon: When it comes to funding from banks, all companies are facing a struggle at the moment. Therefore, institutional investors are redirecting some of the flows to the medium-sized and smaller companies. In the long-term, the spreads embedded in direct loans may come down, but for the moment they seem to be stable. You still get a lot of value for anything under BBB, for example BB or B+. If you look at historical defaults, BB- and B+ have, in nor- mal circumstances, more defaults and slightly lower recovery rates than big companies. During the crisis they had lower defaults because the banks had stopped lending to them before the crisis.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28