Seeking Alpha

IMPACT Day 2: The Liquidity Paradox

by: Seeking Alpha Event Coverage
Summary

A balance of liquid and illiquid assets in a portfolio will be critical for future returns.

Characteristics of illiquid assets have begun to change recently, and investing in them has become easier than in previous years.

Without a greater allocation to more illiquid assets, investors couldn’t expect the same level of return for the next 5 to 10 years that were achieved in the previous 10.

The main takeaway from this session, led by Brian Boulerice of FS Investments, is that for investors a balance of liquid and illiquid assets in a portfolio will be critical for future returns.

Finding Expected Returns In Unexpected Places

He argued that without a greater allocation to more illiquid assets, investors couldn’t expect the same level of return for the next 5 to 10 years that were achieved in the previous 10. Investors goals are and will continue to be the same (growth, income, and diversification), but generating acceptable returns from traditional asset classes would continue to be difficult due to factors like broad market overvaluation, a persistent low interest rate environment, and greater correlation/volatility among assets.

Boulerice pointed out that many investors, particularly those working with advisors, are often unwilling to make concessions in their portfolios in order to gain access to the benefits of less liquid investments. More liquid investments (like passive index funds) are popular because they’re familiar, well (or at least easily) understood, easy to access, and have generally performed well over the last decade. More illiquid funds are avoided because their characteristics are the opposite: they’re difficult to access, less understood, and have a spotty historical track record. However, these characteristics of illiquid assets have begun to change recently, and investing in them has become easier than in previous years.

His final point was that between low risk, high return, or full liquidity, investors would do well to sacrifice some liquidity to maintain the other two characteristics. Having the right partners (like those with specialized knowledge in certain geographies), using different strategies (active vs. passive management), and allocating to different structures (such as private corporate debt) would be key to generating greater returns moving forward.