Illiquid assets use increases despite market dislocation

Liquidity has become more important than ever, according to BT, in the light of the market dislocations experienced during the pandemic.  

Speaking to Money Management, Marnie McLaren, head of investment research and governance at BT, said the industry needed to be sure it learnt lessons from the pandemic.  

It had already been helped, she said, by lessons learnt by the Global Financial Crisis (GFC) which meant firms already ensured there was no mismatch between a fund’s risk profile or investment objectives.  

“As business goes back to normal, it is important for wealth managers and advisers to make sure we learn from the short market dislocation that we saw during COVID,” McLaren said. 

“The main lessons were have learned from COVID are:  

• Ensuring there’s no liquidity mismatch is more important than ever; 
• Funds with larger drawdowns from within their asset class were largely in line with expectations based on previous market stress testing exercises we carried out; and 
• COVID-19 served as an important reminder that you can experience significant correction in global financial markets during severe market dislocation events.” 

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Despite the importance of liquidity, there had been an increase in advisers using alternative products which had higher levels of illiquidity, in light of the low interest rate environment. This was particularly the case for boutique firms who were investing in niche and alternative assets which had higher gearing levels. 

“There’s more appetite from advisers and clients for investments in the alternative space such as private equity funds which hold complex and illiquid assets. We are seeing an increase in illiquid assets, investment complexity and risk profile. 

“This trend has escalated significantly in the past 12 to 18 months and we expect it to continue at pace given the current outlook for rates.” 

In light of this, McLaren said BT regularly undertook liquidity stress testing to ascertain which funds would be most likely be impacted if there were large redemptions.