CLIENT EXPERIENCE

Testing the waters on liquidity reports

Issues around liquidity have clearly caught investors off guard recently but can standard reporting from fund managers really address the problem? Two selectors give us their incisive views on the subject

MARGARYTA KIRAKOSIAN News Editor

It is hard to imagine a conversation between a fund selector and a fund manager these days that doesn’t mention the ‘L’ word, thanks to the recent furore around the illiquidity of absolute return funds managed by Tim Haywood and the alarm bells at bond boutique H2O.

While financial regulators such as the FCA are trying to take the matter into their own hands, it is up to selectors to decide what kind of liquidity reporting they want to see from fund managers. The two fund pickers I spoke to both have strong opinions on the issue.

For Milan-based Matteo Germano, head of multi-asset at Amundi Pioneer, a sharper focus on liquidity has become a key driver in the development of his fund selection process alongside ESG integration and improved quantitative evaluation.

Germano is familiar with both investors’ and asset managers’ sides of the debate, because he not only buys funds but runs them too.

For him, the starting point on liquidity reporting is for a fund manager to be able to provide detailed information on what kind of liquidity they have, as it differs depending on the asset class

and will also change in times of crisIs.

‘We prefer to have more exposure to fund managers that are managing liquidity wisely and use liquidity budgeting,’ he says. Germano’s liquidity assessment of a fund boils down to three key elements: its investment philosophy; the hard numbers behind it; and how much a fund manager is adjusting his or her liquidity to different market conditions.

Another factor he and his team take into account is the capacity of a given strategy and whether this is defined in a clear way.

WHAT A LOAD OF RUBBISH Gary Potter, co-head of multi-manager at BMO Asset Management, says risk systems in fund management companies are now a lot better.

However, when his team asks fund managers about liquidity, the standard response is usually: ‘Our systems tell us that we could liquidate 80% of the portfolio within five working days, 90% within 30 days and we should be able to completely liquidate it in three months.’

In his view, this is nonsense, especially if you apply these numbers under normal liquidity conditions.

‘Unfortunately, or fortunately, I have been around when there wasn’t any liquidity, such as 2007/2008. When it all started to go wrong before that in 1987, I watched the markets fall 25% in a day and the screen seemed to be melting in front of my eyes. There wasn’t any liquidity because there were neither buyers nor sellers.’ Potter says anything published on liquidity is usually not worth the paper it’s written on. That’s why you need to go back and understand what might happen if certain market conditions prevaill, be it 2008/2009 or early 2000s. He adds that if you can’t say you’re happy with the management of the fund if it slides during a downturn, you’re better off eliminating the exposure.

‘I have been through those conditions and it’s not good. We were fortunately not affected because we have open-ended funds and good quality managers. Capacity is the mainstay of our investment process, so we never buy things that are too big or where we have too much of a stake.

‘This issue is likely to become even more prominent as the FCA takes us down the road of understanding how we match liquidity,’ he says.

What can fund managers do in the meantime then, and will the stress tests help? Potter says he has never seen a bad stress test and ultimately fund selectors should be vigilant about linking capacity with what fund managers do.

‘The fund manager is the one calling the shots and they have to decide what is sensible for them to run in circumstances that differ over time,’ he adds.