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The Defined Contribution (DC) obsession with liquidity

The Defined Contribution (DC) obsession with liquidity. Bev Durston 9 th May 2014. The DC Obsession with Liquidity Contents:. Spot the difference Using liquidity as a proxy for risk Market Timing Why so liquid? “Lock-up” vehicles Summary Challenge. “Spot the difference”.

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The Defined Contribution (DC) obsession with liquidity

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  1. The Defined Contribution (DC) obsession with liquidity Bev Durston 9th May 2014

  2. The DC Obsession with LiquidityContents: • Spot the difference • Using liquidity as a proxy for risk • Market Timing • Why so liquid? • “Lock-up” vehicles • Summary • Challenge

  3. “Spot the difference” • Long term investing institutions: • Who are they? • Long time horizons • Strategic Asset Allocation • External and Internal advice • What can we learn?

  4. “Spot the difference”

  5. “Spot the difference”

  6. “Spot the difference” Now spot the difference in DC: • Far greater focus on liquidity • Particularly pronounced in Australia • What causes this difference?

  7. “Spot the difference” What causes this difference? • Objectives • Contributions • Draw down status • Size • The focus on liquidity is a unique DC feature

  8. Using liquidity as a proxy for risk This looks a diversified portfolio….

  9. Using liquidity as a proxy for risk Using liquidity: A one dimensional view….

  10. Using liquidity as a proxy for risk Many lost opportunities

  11. Using liquidity as a proxy for risk Less liquid assets provide: 1) Range of diversifying return patterns 2) Mixture of novel betas 3) Blend of different manager skills • Invest in areas where others are not herding

  12. Using liquidity as a proxy for risk • Investors confuse liquidity with safety • Focus on the investment time horizon

  13. Market Timing • Maintain a liquid portfolio if: • A short term time horizon, or • Good market timing abilities

  14. Market Timing • Warren Buffett example: • Farm / Real Estate investment • “Don’t just sit there, do something” • For many investors, liquidity becomes a curse

  15. Market Timing: Good market timing? • The Little Book of Common Sense Investing by John Bogel • Yesterdays winners become tomorrows losers • Investors lost 57% • Avoid performance chasing based on short term returns

  16. Why so liquid?

  17. Why so liquid?

  18. “Lock-up” vehicles: Advantages

  19. “Lock-up” vehicles:Think Outside the Square 1) Distressed assets 2) Absolute return 3) Direct lending 4) Structured products • Opportunistic diversification

  20. Summary • Superannuation is a long term investment • Is member choice suboptimal for long term investing? • Are DC members “second class” citizens?

  21. Challenge to non traditional investors Where are the industry’s less liquid performance track records? Are we not much good at this? Is it top secret? Why not offered in member choice?

  22. Questions?

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