A Survey of Institutional Investors’ Investment and Management Decisions on Illiquid Assets

Abstract

This article reports the results of a survey of nine Dutch (assets under management [AUM] EUR 342 billion) and five Canadian (AUM CAD 203 billion) pension funds and fiduciary managers on the investment and management decisions regarding illiquid assets. The Dutch pension funds in the sample invest 15% of their portfolio in illiquid assets, whereas the Canadian pension funds invest 34%. The authors put forward three reasons for the stark difference in the average illiquid asset allocations: (1) the strong focus of Dutch survey participants on investment costs, which are made available to the public and are higher for illiquid assets, (2) supervisory requirements, and (3) the division of Dutch pension fund assets into a liability matching portfolio and a return portfolio, which potentially leads to liquid assets crowding out illiquid assets. Regarding the management of illiquid assets, many survey participants report that they perform liquidity stress tests and have liquidity management policies to free up cash if necessary. The authors formulate four best practices based on these findings.

TOPICS: Pension funds, portfolio construction, developed markets, real assets/alternative investments/private equity

Key Findings

• ▪ Both Dutch and Canadian survey participants most often indicated the risk–return trade-off and diversification benefits as their main reasons for investing in illiquid assets.

• ▪ For Canadian survey participants, the upper limit to the illiquid asset allocation is between 15% and 80%, whereas for Dutch funds this is 20% to 25%. Correspondingly, strategic asset allocations to illiquid assets are larger and more heterogeneous for Canadian survey participants.

• ▪ Investors in illiquid assets should regularly perform liquidity stress tests. In addition, they should have an explicit policy regarding which methods to use and in which sequence to free up cash when immediate liquidity needs arise.