Liquidity demands are hindering investors, says top credit manager
Removing managers’ shackles on daily liquidity demands could improve returns by 10%.
by Chris Sloley on Jan 10, 2013 at 13:48
Investors will be 10 percentage points worse off if they demand daily or weekly liquidity rather than allowing a fund manager the time to access more illiquid areas of the market.
Speaking to Citywire Global, Veroude, who stressed his willingness to meet clients’ preference for liquidity, expressed frustration at the constraints daily or weekly liquidity can cause.
‘The biggest challenge facing investors seeking returns is liquidity. This is not restricted to any particular product or segment but is true for the credit market as a whole,’ he said.
‘Credit investments that produce the best returns are not always the most liquid. Because many investors want daily or weekly liquidity, the pool of assets which also provide attractive returns is just not big.’
Putting the difference in possibilities into figures, Veroude said he anticipates a much different performance between those who want greater liquidity compared to those who don’t.
‘An illiquid portfolio could return up to 10 percentage points more in 2013 than a liquid portfolio – this is as big a gap as there has ever been,’ he said.
‘We work with clients and present opportunities to them. If they need liquidity then they will have one type of portfolio but if they are willing to go to a quarterly lock-up, or a one-year lock-up, then this will create a much different profile.’
In Veroude’s €620 million fund he currently has 20% of the portfolio exposed to subordinated financials, 10% in high yield and 50% in mezzanine asset-backed securities.
In terms of performance, Veroude said subordinated financials – an example of a more illiquid investment – had contributed 40% of his performance in 2012, while high yield contributed 22% and mezzanine ABS was 22-24%.
Over the past three years the Insight – Absolute Credit fund has returned 48.14%. This compares to the average manager in the Citywire Alternative Ucits Credit Strategies sector, who has returned 17.41% over the same period.
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