Liquidity is never far from the minds of institutional asset owners but the importance of having a comprehensive liquidity plan came into sharp relief during the pandemic-induced spike in market volatility earlier this year.

When stock prices plummeted in February and March, the asset allocation of many institutional portfolios fell out of synch with policy benchmarks, with asset owners finding themselves significantly underweight equity and overweight fixed income.

That would have been the perfect time to rebalance, but an investor holding, for example, a portfolio of 60% stocks and 40% bonds, would have likely faced liquidity constraints because of a heavy increase in selling as volatility surged.

Beyond times of stress, institutional investors such as pension funds, endowments and foundations, face steady liquidity pressures as they work to manage obligations to meet capital calls and benefit payments in addition to regular portfolio rebalancing. Meeting liquidity needs can be challenging in any environment.

While traditional strategies such as keeping the entire portfolio invested internally or with third-party managers or keeping a portion of the asset allocation in cash to meet near-term needs have stood the test of time, institutional investors today can also use exchange-traded funds (ETFs) to do so in an efficient and cost-effective manner.

Read more @Pionline