Pension fund liquidity 'gathering dust', warns PGGM

Liquidity within pension fund portfolios is “gathering dust”, and schemes are missing out on opportunities to make a return, PGGM’s head of credit has warned.

Mascha Canio said it was important for investors to ride out volatility, and that it was not always necessary for them to realise mark-to-market losses that occurred during times of market upset.

Canio, head of credit and insurance-linked investments at the €183bn Dutch pension manager, was speaking at last week’s IPE 360 conference on risk & asset allocation at the London Stock Exchange, arguing that pension funds should consider investments outside of the traditional credit allocations.

“There’s a lot of liquidity that pension funds have in their portfolio that’s never used – so it’s just collecting dust, in a way,” she told delegates.

“Or to put it maybe a bit more negatively, you’re leaving opportunities to make a return.”

Canio admitted that tackling the existing investment challenges was not easy for pension investors.

“I don’t know what the solution is, because I do know how pension fund boards of trustees struggle with those challenges, and you’re supposed to have an answer every single day for every question.”

Canio’s comments were in response to fellow panellist Justin Bourgette, portfolio manager at Eaton Vance Investment Management, who urged investors not to rely on “off-the-shelf” value-at-risk modelling when investing in credit.

“Throw those out the window,” Bourgette said, “because they tell investors to do the exact wrong thing at the wrong time.”

He recalled 2006, with its “benign” market conditions, which saw investors encouraged to increase leverage to generate returns – something that occurred, he argued, at “exactly the wrong time”.

“Conversely,” he added, “the crisis happened, and buyer levels spiked up even if you didn’t change your underlying portfolio – and a lot of [investors were told] ‘You need to de-risk, you need to take risk out of the portfolio’ and begin selling at exactly the wrong time.”

Bourgette argued that such mark-to-market crises were “extremely hard” to predict accurately, but he said the use of a valuation approach better assessed if the investor was being compensated fairly for the associated risk.

Canio concurred, and said it was important to invest in such a way that investors could “still sleep at night when it’s stormy out”.

Discussing the market crash described by Bourgette, she added: “You do see mark-to-market hitting you all over the place.

“But try to look through the storm and hold onto your investments, because realising losses is very painful – and maybe, with the benefit of hindsight, not necessary to do.”