Certain or Liquid: A New Way to Class Assets

How investors classify their investments might be holding them back from achieving the outcomes they want, according to analysis by consulting firm Redington.

Categorisation of assets has become meaningless for pension investors, according to Redington Associate Alice Cheung, as the sector has spread beyond simple boundaries of existing terms such as “equities” and “bonds”.

Even the trend for calling assets “growth” or “matching” has become futile, she argued.

“Even without the last few crises, it is clear that risk, return, and relative value are subjective and will fluctuate.”—Alice Cheung, Redington“What is the level of return that earns an asset class the title ‘growth’?” said Cheung. “Is it ‘matching’ if it has duration? Even now with corporate bonds, you would be unable to get a consensus for ‘growth’ or ‘matching’ with a group of 10 pension people. How are we to make good investment decisions using a system that is inconsistent within its own industry?”

Cheung maintained that catch-all terms, such as “alternatives” were not helpful either, as they covered too much and left investors often lost and not getting what they expected.

Instead, she encouraged investors to think about what they wanted from their portfolios.

“Before we dive into conjuring every shade of classes between matching and growth, perhaps it’s time to rethink what pension funds need from their assets,” she said. “Even without the last few crises, it is clear that risk, return, and relative value are subjective and will fluctuate.”

The attributes that pension investors value are two-fold, according to Cheung: Cash flow certainty and liquidity.

The certainty of cash flow from an asset can be plotted on an axis alongside another showing its liquidity. This would allow investors to choose from a spectrum of assets depending on their own particular needs rather than use arbitrary valuations and measurements, she said.

However, she warned that to implement such changes within a pension or other institutional investor a strong governance model would be essential.

Cheung’s analysis can be found on the Redington website.

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