Singapore, 14 April 2020 – The search for higher returns and better diversification has led many institutional investors to allocate more capital to illiquid private assets. However, as this allocation increases, the liquidity characteristics of their portfolios change. Particularly given the current market volatility, investors need to know how different portfolio structures and private asset commitment strategies may affect their ability to respond to various liquidity demands.

PGIM Inc., the US$1 trillion global investment management business of Prudential Financial, Inc. (NYSE: PRU) has collaborated with GIC, Singapore’s sovereign wealth fund, to create a framework that links top-down asset allocation with bottom-up private asset investing to support investors who are increasingly faced with the difficult choice between potentially higher portfolio returns and greater liquidity.

PGIM’s Institutional Advisory & Solutions (IAS) group and GIC’s Economics & Investment Strategy (EIS) department, enhanced and expanded PGIM’s asset allocation framework, OASISTM (Optimal Asset Allocation with Illiquid Assets) to formally integrate liquidity measurement and cash flow management into a multi-asset, multi-period portfolio construction process. This customizable framework, measuring the potential trade-off between asset allocations, total portfolio performance and the frequency of certain liquidity events with different severities, can help investors quantify the interaction between their portfolio structure and performance.

“Investors can use this framework to analyze how allocations to illiquid private assets, in combination with their private asset commitment strategy, may affect their portfolio’s liquidity,” says Junying Shen, PGIM’s senior associate and one of the principal authors of the research along with GIC’s Dr. Grace Qiu and Ding Li. “Investors can formulate a private asset commitment strategy to manage private asset exposure, determine desired allocations for their liquidity risk tolerance, and model how different market environments could affect their portfolio’s performance and liquidity,” says Shen.

OASISTM allows investors to incorporate their capital market assumptions, views on private asset performance and their fund-selection skill, and variety of commitment strategies, as well as conduct sensitivity analysis and stress testing.

“Portfolios with large allocations to private assets need to meet substantial cash flow obligations. This is especially challenging in today’s environment,” says Kevin Bong, director of GIC’s EIS department. “The framework we have created enables long-term investors to analyze the liquidity consequences of different commitment strategies and stress scenarios. This will help investors target the best portfolio performance for a given level of liquidity risk.”

“Constructing multi-asset portfolios, with both liquid and illiquid assets while faithfully acknowledging the distinct characteristics of each, is a challenge facing CIOs globally,” says Bruce D. Phelps, head of PGIM’s IAS group. “Collaborating with senior GIC researchers was a rare and wonderful opportunity to develop a novel framework to help CIOs formalize their decision making around portfolio liquidity choices.”

For more details, read the full paper: Building a Better Portfolio: Balancing Performance and Liquidity.