By Jayson Forrest
What are the benefits of illiquid assets and how do you access them? These were some of the questions that Daniel Choo (Russell Investments), Matthew Swieconek (Findex), and Ryan Synnot (Arrow Private Wealth) tackled at the 2023 IMAP Independent Thought Conference.
While many investors might ‘shy’ away from illiquid investments or have difficulty in accessing them, these types of assets — like unlisted property, private equity, private debt, and venture capital — can provide investors with potentially higher returns and lower levels of portfolio volatility.
At Findex — an integrated advisory business — illiquid assets are the foundation for a number of its model portfolios. According to Matthew Swieconek — Head of Investment Relations at Findex — illiquid assets are used to provide investors with stable and reliable returns, a liquidity premium, and a lower level of volatility.
“When we assess a manager and strategy, we look just as closely at the drawdown and risk characteristics of a particular strategy, as we do the return,” he says. “When we’re building our model portfolios, we know illiquid assets are going to be a static allocation, so we’re not looking at tilting heavily in those particular assets. Instead, we use bonds and equities to take active tilts around our unlisted assets, because we don’t want to be in a position where we become forced sellers.
“So, illiquid assets are instrumental in our portfolios. We believe the duration of these assets provides a portfolio with diversity and lower levels of volatility.”
As part of a panel discussion at the 2023 IMAP Independent Thought Conference in Melbourne, Daniel Choo — Head of Multi-Asset APAC at Russell Investments — agreed with Matthew’s views on illiquid assets. Referring to research conducted by Russell Investments, Daniel says there are a range of benefits for using illiquid assets, including the liquidity premium for locking away capital and the ever increasing range of private companies to invest in, compared to public companies, where the number of listed companies has dropped by 40 per cent over the last 20 years.
While Matthew agrees that illiquid assets do bring a range of benefits to a portfolio, he adds that Findex doesn’t invest in illiquid assets purely for the return or the illiquidity premium that it brings. Instead, it uses illiquid assets for the cushioning impact they bring to reduce the volatility across the portfolio.
“This provides significant value for our clients, who are primarily in the pre-retiree/retiree phase,” says Matthew.
Daniel Choo - Russell Investments.
Matthew Swieconek - Findex
Ryan Synnot, CFA - Arrow Private Wealth
When we assess a manager and strategy, we look just as closely at the drawdown and risk characteristics of a particular strategy, as we do the return. When we’re building our model portfolios, we know illiquid assets are going to be a static allocation, so we’re not looking at tilting heavily in those particular assets. Instead, we use bonds and equities to take active tilts around our unlisted assets, because we don’t want to be in a position where we become forced sellers
Attractive sub-sectors
Looking at the various sub-sectors of illiquids, Ryan Synnot, CFA, — Associate Director, Investment Research and Solutions at Arrow Private Wealth — finds the private debt market particularly attractive.
“The yields on private debt are getting towards the high single/low double digit return, which we view as being attractive, particularly relative to where some of the risks are within equities.
In terms of which parts of private debt we like, we prefer investments that are really safe, but we’ll also look at distressed opportunities,” says Ryan.
“We also believe venture capital is becoming quite interesting. We’ve seen a big power shift from founders to investors.
A couple of years ago, founders were able to demand their price, which meant people were investing in these companies at incredibly high multiples.
But that situation has since swung back to favour investors, where they can now access start-up businesses on quite favourable terms.”
You need to assess your client base and determine which products are the best fit for your clients and their liquidity needs. It’s also an education journey. You also need to educate your clients about why you’re looking to put illiquid investments in their portfolio, which also means talking about the liquidity premium for locking up their capital for a period of time
A disciplined approach to illiquid assets
With private market assets forming the foundation of many of Findex’s model portfolios, the business has elected not to follow the investment allocations of the likes of the Future Fund or the Yale Endowment Fund, which also allocate to private markets. Matthew says it all comes down to the business’s investment framework.
“We have a strategic allocation of 15 per cent to alternatives, and another 5 per cent to unlisted property. So, about 20 per cent of our overall exposure are in illiquid assets. However, not all of our alternatives exposure is fully illiquid. Some of it will range from monthly liquidity through to 1-2 years. For example, within some of our alternative structures, we have 23 underlying strategies. So, we ensure we have sufficient liquidity to cater for situations where liquidity is needed for clients,” says Matthew.
When it comes to accessing illiquid assets, Findex uses a methodical approach for assessing assets as part of its strategic allocation to sectors like property and alternatives. This process includes interviewing various managers — both retail and institutional.
“Once we determine which asset classes we want to invest into, we’ll meet with managers and provide them with a framework in terms of what we’re seeking. For example, we may ask them to construct a portfolio at a certain risk level in terms of standard deviation and drawdown, but also with minimum fees when minimum returns are delivered,” he says. “We don’t actually make the selection of the underlying strategies of the assets. We’ll leave that to the managers.”
By providing a framework to managers, Findex is able to find the right blend of strategies that fit the framework. This means it’s the manager who is ultimately making the determination on the underlying strategies — like long/short equities, credit, or global macro. Similarly, for unlisted property, Findex will invest with managers that make the call on the underlying properties or on the external property managers they use.
It’s a similar story at Arrow Private Wealth, where the underlying strategies of illiquid assets are also allocated to managers. However, Ryan believes it’s important for advice businesses to be adaptable in order to cater for clients who want to access illiquid assets.
“You need to assess your client base and determine which products are the best fit for your clients and their liquidity needs,” he says. “It’s also an education journey. You also need to educate your clients about why you’re looking to put illiquid investments in their portfolio, which also means talking about the liquidity premium for locking up their capital for a period of time.”
About six years ago, when we were running strategic allocations to private equity, there were only two products that retail investors could access. But over the last couple of years, we’ve seen more illiquid products come to market that retail investors can access and advisers can use in their portfolios
Trends in illiquid assets
With the ever-present possibility of many developed economies falling into recession, Ryan believes the current environment does make it challenging for illiquid assets, but he also acknowledges that it also presents opportunities for investors.
“There is always the risk of lock-up when you take an asset class that is usually illiquid and try and introduce liquidity to it. So, when you get ‘black swan’ events and downturns in particular asset classes, it’s going to present a risk,” he says. “However, because we make allocations to illiquid assets with a very long-term view, when investors do look to exit these assets, that does provide buying opportunities.”
A definite trend Ryan is seeing in this sector is the growth of illiquid asset products coming to market.
“About six years ago, when we were running strategic allocations to private equity, there were only two products that retail investors could access. But over the last couple of years, we’ve seen more illiquid products come to market that retail investors can access and advisers can use in their portfolios,” says Ryan.
According to Daniel, a recent survey of 100 private market fund managers by Russell Investments confirms the increase in the number of illiquid asset products coming to market.
However, whilst acknowledging this growth in products, Daniel also concedes that the majority of platforms in the market still can’t accommodate illiquid assets, although there are a couple of platforms currently working on their technology to enable this to occur.
Matthew agrees: “From a practitioner’s perspective, we’re being inundated with interest by managers in the illiquids space, both locally and offshore. In the last month alone, we’ve met with about six managers. This space is certainly going to increase in size.
“As we move forward, products will evolve and platforms will increasingly be able to cater for illiquid assets. That’s because there is an increasing appetite from advisers and investors to take up this investment opportunity.”
As we move forward, products will evolve and platforms will increasingly be able to cater for illiquid assets. That’s because there is an increasing appetite from advisers and investors to take up this investment opportunity
About
Ryan Synnot, CFA is Associate Director, Investment Research and Solutions at Arrow Private Wealth; and
Matthew Swieconek is Head of Investment Relations at Findex.
They spoke on ‘Illiquid assets — Selection and strategies’ at the 2023 IMAP Independent Thought Conference in Melbourne.
The session was moderated by Daniel Choo — Head of Multi-Asset APAC at Russell Investments.
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