The Defined Contribution (DC) obsession with liquidity
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THE DEFINED CONTRIBUTION (DC) OBSESSION WITH
LIQUIDITY
Bev Durston9th May 2014
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The DC Obsession with LiquidityContents:
• Spot the difference• Using liquidity as a proxy for risk• Market Timing• Why so liquid?• “Lock-up” vehicles• Summary • Challenge
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“Spot the difference”Long term investing institutions:
Who are they?
Long time horizons
Strategic Asset Allocation
External and Internal advice
What can we learn?
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“Spot the difference”
Asset Class Allocation Endowment Yale Endowment SWF SWFListed Equities 40% 17% 43% 32%Fixed Income 10% 5% 12% 19%Cash 3% 0% 9% 4%Property 4% 19% 5% 10%Alternatives: Abs return, PE, Other, Infra 43% 59% 30% 35%Total Assets 100% 100% 100% 100%% in less liquid assets = Pty Plus Alts 47% 78% 36% 45%
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“Spot the difference”
Asset Class Allocation Family Office UK DB scheme UK DB schemeListed Equities 33% 51% 48%Fixed Income 16% 22% 32%Cash 1% 2% 0%Property 12% 7% 10%Alternatives: Abs return, PE, Other, Infra 39% 19% 10%Total Assets 100% 100% 100%% in less liquid assets = Pty Plus Alts 51% 25% 20%
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“Spot the difference”
Now spot the difference in DC:
Far greater focus on liquidity Particularly pronounced in AustraliaWhat causes this difference?
Asset Class Allocation Australian DC Australian DC Australian DC Australian DC Industry FundListed Equities 44% 71% 58% 69% 59%Fixed Income 35% 22% 28% 7% 11%Cash 16% 5% 8% 8% 5%Property 5% 0% 0% 9% 9%Alternatives: Abs return, PE, Other, Infra 0% 2% 6% 7% 16%Total Assets 100% 100% 100% 100% 100%% in less liquid assets = Pty Plus Alts 5% 2% 6% 16% 25%
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“Spot the difference”
What causes this difference?
Objectives
Contributions
Draw down status
Size
The focus on liquidity is a unique DC feature
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Using liquidity as a proxy for risk
Return %
Equities
Property
Bonds
Cash
Risk %
This looks a diversified portfolio….
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Using liquidity as a proxy for riskMore Liquid
Equities
Cash Bonds Listed Property
Medium Liquidity
Less Liquid
Risk %
Using liquidity: A one dimensional view….
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Using liquidity as a proxy for riskMore Liquid
Equities
Cash Bonds Listed Property
Medium LiquidityHigh Yield
Frontier marketsAbsolute return Loans Natural Resources
Distressed Convertibles InfrastructureDirect lending
Less Liquid
DirectProperty
Risk %
Private Debt
Private Equity
Many lost opportunities
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Using liquidity as a proxy for risk
Less liquid assets provide:
1) Range of diversifying return patterns
2) Mixture of novel betas
3) Blend of different manager skills
Invest in areas where others are not herding
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Using liquidity as a proxy for risk
Investors confuse liquidity with safetyFocus on the investment time horizon
Asset Class Liquidity (ability to cash in / out) Frequency of pricing Investment time horizon (years)Listed Equities High Daily 7 - 10Private Equity Low Quarterly 7 - 10Listed Bonds High Daily 1 - 7Private bonds Low - Medium Quarterly 3 - 7Listed Property Medium to High Daily 7 - 10Direct Property Low Annual 7 - 10Listed Infrastructure Medium to High Daily 7 - 10Unlisted Infrastructure Low Quarterly 7 - 20Distressed investing Low Quarterly 5 - 10Absolute return assets Medium to High Monthly 1 month - 5 yearsAlternative assets Low to Medium Monthly - Quarterly 1 - 6Cash High Daily Daily
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Market Timing
Maintain a liquid portfolio if:
A short term time horizon, or
Good market timing abilities
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Market Timing
Warren Buffett example:
Farm / Real Estate investment
“Don’t just sit there, do something” For many investors,
liquidity becomes a curse
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Market Timing: Good market timing?
The Little Book of Common Sense Investing by John Bogel
Yesterdays winners become tomorrows losers
Investors lost 57%
Avoid performance chasing based on short term returns
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• Member Choice1• Regulation2• Short termism / Historical3• Agency: Activity measure4• Funds management industry5• No illiquidity premium6• Lack of size and scale7 • Fees8
Why so liquid?
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Why so liquid?
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• Opportunistic draw down1• Controlled use of leverage2• No forced exits3• Performance fees on sales4
• Alignment of interest5
“Lock-up” vehicles: Advantages
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“Lock-up” vehicles:Think Outside the Square
1) Distressed assets
2) Absolute return
3) Direct lending
4) Structured products
Opportunistic diversification
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Summary
1. Superannuation is a long term investment
2. Is member choice suboptimal for long term investing?
Are DC members “second class” citizens?
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Challenge to non traditional investors
Where are the industry’s less liquid performance track records?
Are we not much good at this?
Is it top secret?
Why not offered in member choice?
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QUESTIONS?