Long-Term Investors Need Short-Term Liquidity, According to BNY Mellon Asset Management
November 10 2009 - 7:59AM
PR Newswire (US)
Study shows lack of liquidity leads to forced selling in distressed
markets BOSTON, Nov. 10 /PRNewswire-FirstCall/ -- Long-term
investors must plan for the short and medium term in order to avoid
forced selling in distressed markets, according to a recent
analysis by BNY Mellon Asset Management. "This is exactly what
happened to many university endowments during the 2008 market
meltdown," said Robert A. Jaeger, senior market strategist for BNY
Mellon Asset Management and co-author of the study. "Every
long-term investor is also a short-term investor and a medium-term
investor. We believe that endowments and other long-term investors
would be well-served to explicitly divide their portfolios into
long-term, medium-term, and short-term components." The long-term
component can aggressively seek out risk and give up liquidity, but
the other components cannot, Jaeger said. He added, "If you don't
have short-term liquidity, you can't be an effective long-term
investor. You become a forced seller in distressed markets." The
co-authors of the study are Michael Rausch, assistant director of
research and analysis for BNY Mellon Asset Management, and Margaret
Foley, director of the endowments and foundations resource center
for BNY Mellon Asset Management. BNY Mellon Asset Management
suggests that long-term investors create at least three
sub-portfolios, which have different investment objectives,
different expected returns, different liquidity constraints, and
may even be based on different capital market expectations. The
short-term sub-portfolio is designed to deliver a positive nominal
return; the medium-term sub-portfolio is designed to deliver a
positive return after inflation; the long-term portfolio is
designed to deliver a positive return after inflation and spending.
The long-term portfolio is the most aggressive and least liquid of
the three. The relative size of the three portfolios is determined
by the spending needs of the institution. "The overall return of
the portfolio would be a blend of the returns achieved by the three
sub-portfolios," said Foley. "Although the analysis recommends a
higher allocation to defensive assets, once that allocation is made
the investor is in a better position to take intelligent risks in
the long-term component of the portfolio." Rausch added, "The
buffer provided by the shorter-term and medium-term sub-portfolios
allows investors to stay in the game and participate in the
significant upside of a market cycle." Notes to Editors: BNY Mellon
Asset Management is the umbrella organization for BNY Mellon's
affiliated investment management firms and global distribution
companies. BNY Mellon is the corporate brand of The Bank of New
York Mellon Corporation. BNY Mellon is a global financial services
company focused on helping clients manage and service their
financial assets, operating in 34 countries and serving more than
100 markets. BNY Mellon is a leading provider of financial services
for institutions, corporations and high-net-worth individuals,
providing superior asset management and wealth management, asset
servicing, issuer services, clearing services and treasury services
through a worldwide client-focused team. It has $22.1 trillion in
assets under custody and administration and $966 billion in assets
under management, services $11.9 trillion in outstanding debt and
processes global payments averaging $1.6 trillion per day.
Additional information is available at http://www.bnymellon.com/.
All information source BNY Mellon Asset Management as of September
30, 2009, except where noted. This press release is issued by BNY
Mellon Asset Management to members of the financial press and media
and the information contained herein should not be construed as
investment advice. Past performance is not a guide to future
performance. DATASOURCE: BNY Mellon Asset Management CONTACT: Mike
Dunn, +1-212-922-7859, Web Site: http://www.bnymellon.com/
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