Pension funds are increasingly treating liquidity as a strategic portfolio allocation in its own right and not just as a buffer, as private markets exposure continues to increase across the institutional investment sector, research from Northern Trust has revealed.
According to the investment manager’s second annual global peer study, the rapid growth of allocations to private assets is fundamentally reshaping how asset owners think about governance, portfolio construction and operational resilience, with liquidity management emerging as one of the most significant consequences.
Mark Austin, pensions and insurance sector lead at Northern Trust, said that private markets penetration among asset owners has risen from 86% to 94% over the past year. This has brought the industry close to “actual full penetration” of the sector, Austin added.
But while pension schemes continue to expand into private equity, private credit, infrastructure and natural resources, many are simultaneously increasing their liquidity reserves to manage the operational and governance complexities that come with those investments.
The survey found that 56% of respondents now hold liquidity primarily for risk protection purposes, while 55% said they wanted a “strategic liquidity reserve”, language that, according to Austin, suggests liquidity is increasingly viewed as a permanent portfolio feature rather than a temporary defensive allocation.
Overall, 60% of survey respondents said liquidity has become more important over the past year.
Austin said this marked a notable shift for institutional investors, particularly given that high cash balances would previously have been viewed as a drag on returns during years of ultra-low interest rates.
“When we did the report last year, I was astounded that some of the clients were looking at liquidity of 10%,11%, 12%, which seemed like an enormous amount,” he said. “And given where the rates were at the time, you were thinking, ‘That’s got to have a massive performance drag.’”
However, Austin said that the persistence of those allocations in this year’s survey indicated that pension schemes are becoming more comfortable holding larger liquidity buffers, particularly as higher interest rates improve the return profile of liquid assets.
He explained that while three or five years ago the return horizon was 1% or less, it was not really a “decent-yielding asset class”, but now the return horizon is getting closer to 5% for many currencies.
“I think interest rates where they are right now make that a reasonable asset class to have,” Austin said.
