Marie-Anne ALLIER, Deputy Global Head of Fixed Income at Amundi
Michael WYRSCH, Chief Investment Officer of Vision Super Pty Ltd, Australia
Moderated by: Guillaume MAUJEAN, Chief Editor of Finance & Markets at Les Echos
Liquidity: Defined And Measured
Liquidity is commonly defined as the ability to buy or sell a substantial amount of financial assets at close to current market price over a short period of time. In other words, liquidity is a trifecta of volume, price and time. According to Marie-Anne Allier, when it comes to how to measure it, much depends on what, exactly one wants to measure: fund liquidity, asset class liquidity, or even an asset manager liquidity — the methodology will be quite different depending on the stage. That said, measurement is essential – without it, one cannot manage, she asserted, saying, “To manage the liquidity, we have to find the right measure.”
Liquidity And The Evolution Of Investor Behaviour
On whether there has been a shift in investor behaviour in terms of liquidity, Michael Wyrsch was clear: “I think the answer is yes. People got burned in the financial crisis, and they are much more sensitive now to a potential liquidity crisis than they used to be. We say that people learn a lot more quickly, that they are more willing to move out of asset classes than they used to be. I don’t think it’s a good thing; it’s probably costing them, but they are moving a lot faster than they used to. Behaviour has certainly changed and it will continue to evolve.”
Ms. Allier agreed, noting, “We see evolution in RFP, where it is very common to field questions about our liquidity and our liquidity processes. We are also seeing an increase in requests to add some so-called illiquid assets in clients’ portfolio allocation. We are seeing that people who, in the past, wanted “buy and hold” or “buy and watch” portfolios are adapting. In short, people are more concerned than before about liquidity, and they are changing the way they allocate to adapt to the market.”
Preparing For The Worst Case Scenario
When asked to describe the worst possible context for liquidity and how to prepare for it, Ms. Allier did not mince her words, stating that a UK exit from the EU, combined with a Podemos government in Spain, Federal Reserve rate hikes that exceed forecasts and collapsing oil prices would lead to the perfect environment for a liquidity crisis.
Speaking on how best to manage such a scenario, Ms. Allier continued, “We can’t manage with an end-of-the-world scenario as the only scenario. What we can do is ensure we have experienced fund managers with steady nerves, solid economic research, and concrete strategic research and exploit probability without gambling. That is the best roadmap to navigating a crisis and come out the other side.”
The Cost Of Liquidity
On the real cost of liquidity, Ms. Allier said: “It has to do with cash buffer, so for bonds, it has to do with the liquidity coverage ratio cost. It has to do with the fact that sometime you don’t put as many bets in your portfolio, or not strong, because you fear that you are not able to exit. Volatility is the cost of liquidity, because when you look at what happened at the beginning of 2016, you see that the most liquid assets were the first to be sold. So, if you want to have more liquid assets, you will probably expose your portfolio to more volatility.”
Mr. Wyrsch added that there is a hidden cost in terms of the resources required to better measure liquidity and different scenarios.
When using gates in the liquidity crisis, the question of how asset managers can avoid causing problems for insurance companies that finance and have to manage their own liquidity issues was raised. Mr. Wyrsch said, “I think that in those situations, you really have to work hard. You have to talk to your clients. You have to help them find solutions. In some cases, it makes sense for them to share experience as well. We have seen this in the past. My perception was that investors act pretty rationally – it’s just a questions of talking to them and helping them find a solution.”