WHAT IF YOU COULD VISUALISE THE ASSET UNIVERSE ON A SINGLE POSTER?

“When deciding how to invest a pension fund’s resources you must consider the indexation treatment of each liability tranche to get an accurate picture of the interest rate and inflation sensitivity of scheme liabilities”…

…was definitely not what was going through our heads when first joining Redington. It’s easy to look back just 10 months and laugh at those, frankly, basic questions.

The asset universe is an endless world of complexity. A world full of mystery and confusion.

Even the acronyms themselves were more than enough to deal with, let alone the various styles that are harnessed by a multi-asset strategy!

One thing was clear, mastering the asset universe is no mean feat.

But there is an even harder task…

Crafting a bespoke portfolio with these assets to fulfil set investment objectives. How do you find an appropriate level of risk while maintaining return. What about liquidity or cash flow matching qualities, the list goes on. And they are all important questions.

How could this undertaking be simpler for everyone?

It would be foolish of us at this point to offer a flawless solution to these questions. The state of the pensions industry is ample evidence this is far from achievable.

So we asked ourselves the question …

What if you could visualise the asset universe on a single poster?

Asset Class Universe

We mapped a range of asset classes according to their expected risk, returns and liquidity. A light-hearted design maps out a “spectrum of liquidity”:

  • the ocean represents highly liquid assets
  • a rainforest to cover those assets that fall into the semi-liquid category
  • and a dry, arid desert where only the illiquids are found.

So, how is this relevant to an investor?

Starting from the left, we can see traditional asset classes of equities and government bonds. These are often the building blocks of a portfolio – the equities give higher returns but are riskier, and the government bonds provide a safety net of certain returns.

But why limit yourself to this one small section of the asset class universe?

Looking across the liquidity spectrum, there are clearly opportunities other than government bonds for investing in low-risk assets, and there are many high-return assets other than equities.

This is not to say that everyone should swap all their gilts for infrastructure debt and their equities for distressed debt.

After all, the further right you move along the graph, the less liquid your assets become – it’ll be hard to access your money if it’s invested over here. However, just because something is a little less familiar and less liquid does not mean it should be ignored;

In fact, quite the opposite.

Upon arriving at Redington and being thrown headlong into a whole new world of asset classes, it was those in the far flung illiquid space that were most interesting. Rather than being interpreted as intimidating (to both the veterans and the newbies), these asset classes could offer exciting prospects for diversification within a portfolio.

Author: Tom Pilcher / Keir Macdonald

Tom joined Redington as part of the investment consulting team in 2014, having completed an internship with the firm the previous summer. He works closely with senior members of the consulting team to provide analysis and advice for a range of clients, and also involved in RedStart: an initiative to provide financial education to school children. Tom achieved First class honours in his BSc Economics and Accounting degree at Bristol University. He enjoys running, skiing and cricket. ============================== Keir joined Redington in 2014 in the Manager Research Team having completed a Classics degree at Oxford University. Outside of work he enjoys running and rowing.