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Evolution of a Crisis Response—Part 5: Market Liquidity

03 April 2020   |  

This is part 5 in a series discussing Artisan Partners’ response to the COVID-19 outbreak. Read part 1 here, part 2 here, part 3 here and part 4 here.

Long-term, sophisticated relationships require two willing partners. By design, our client base consists of long-term, sophisticated investors in two primary groups: 66% of our AUM is from institutional clients, and 29% of our AUM is sourced through financial intermediaries—including broker/dealers, bank trust departments and financial advisors. Over the years, these two groups have adopted similar research processes for selecting their investment management partners and have asked relatively similar questions of us. As I alluded to in my last post, one of the critical recent questions we’ve been getting is how liquidity currently looks in the markets—a multifaceted question. 

At its most basic level—and particularly early in a period of heightened volatility and sharp downward pressure on prices—the question often is whether investors can liquidate their investments in a standard, reasonable timeframe. That’s really a question about volume: Provided trading volumes are sufficient, there should be little challenge redeeming positions. Over the past couple weeks, equity volumes have been substantially higher than historical averages—so volume hasn’t been a particular issue on the equity side. It’s worth acknowledging recent reports of hedge funds limiting redemptions and liquidity concerns in credit markets. Hedge funds are often harder to redeem by design—the question really is whether their underlying investments have liquidity. As for credit markets, liquidity has been marginally tighter. All told, expeditious redemptions in those investments may be a bit more challenging than in equities. And they may cost more—which leads to the next point.

While trading volume, especially on the equity side, has been sufficient to allow for timely redemptions, we have seen trading costs increase some as bid/ask spreads have widened. There are many factors that drive the cost of exiting a position, including the size of the position, the concentration of the investment strategy, and most importantly the liquidity of the underlying investments. The key to deftly trading is getting into and out of a security without meaningfully moving it along the way.

I talk frequently with our traders to get a sense of what they’re seeing on the front lines. They’ve stressed to me that while trading conditions have certainly shifted relative to a year like 2019, they’re not struggling to find the liquidity needed to implement our investment strategies. Yes, the cost may be higher while volatility remains heightened, but we haven’t seen and don’t currently anticipate any meaningful impairment to our trading ability.

In addition to the heightened volume compared to 2019, we’ve read numerous reports about meaningful flows into global equities and high yield credit strategies as pension funds rebalance into quarter end. To put some numbers around it, UBS estimated up to $255 billion of global equity buying among pensions during the last week of March. The combination of liquidity, active buyers and sellers and good long-term relationships provides a solid foundation for positive ongoing conversations with our clients about whether and when to put new money to work in the markets.

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