- This article explains what liquid assets are, why they should be included in an investment portfolio, and provides some examples.
- The information is aimed at asset managers seeking to leverage the benefits of liquidity to build more effective strategies.
- FlexFunds offers an asset securitization program that facilitates the distribution of investment strategies composed of a wide variety of listed liquid assets. For more information, feel free to contact our experts.
Modern investment strategies often include different types of financial assets, as the goal is to properly adapt them to the investors’ objectives, profiles, and needs. Nevertheless, in most cases, liquid assets tend to play a central role due to their great importance.
What exactly are liquid assets?
Liquid assets are a type of financial asset that can be very easily converted into cash available for use. In contrast, illiquid assets are those that are difficult to turn into liquid capital.
“Liquid investments can be easily sold and without paying a high commission to obtain cash when needed,” explains the U.S. Securities and Exchange Commission (SEC).
There are many examples of liquid assets, but among the most notable are the shares of large publicly traded companies and bonds. Exchange-traded funds (ETFs) and certain collective investment vehicles, such as money market funds, are also included.
Why is liquidity crucial in a portfolio?
Liquidity is crucial in an investment portfolio because it is always important to be able to convert financial assets into cash that is readily available for use.
While some strategies are designed with the long term in mind, unforeseen events can occur. The fundamentals of a company may change, making it necessary to sell its shares quickly. Or a global event, such as the 2020 pandemic, might arise, requiring a portfolio reshuffle.
In other cases, a more attractive investment opportunity may appear, requiring the sale of financial assets to obtain the necessary capital.
If an investment portfolio does not have sufficient liquidity, it can be very risky for investors. They may suffer an avoidable loss of value or miss out on a business opportunity, for example.
Liquid assets in diversified portfolio planning
When building diversified portfolios, liquid assets play a fundamental role. Normally, a diversified portfolio includes “non-traditional” assets such as real estate, hedge funds, commodities, and currencies.
For this reason, managers should also include liquid assets such as stocks and bonds. These allow for quick access to cash if a specific amount is needed, for instance, to take advantage of another investment opportunity.
For example, a portfolio focused on real estate would be almost completely illiquid. This means the asset manager would not be able to quickly and conveniently access capital to invest in a company that has just gone public and shows strong potential.
In addition, within liquid assets, there is also cash itself. Holding cash reduces the overall volatility of the portfolio, although it comes at the cost of lower potential returns.
How to strategically integrate liquid assets
While liquid assets should be considered in portfolio construction, they should not be included arbitrarily.
An investment portfolio should have the right amount of liquid assets—whether bonds or stocks—based on the client’s investor profile, goals, and needs. The macroeconomic context and market conditions should also be taken into account.
At this stage, an interdisciplinary team of analysts, traders, and portfolio managers should assess the situation and properly balance the portfolio.
Transforming unproductive assets into liquid ones
Liquid assets are essential in portfolio construction, but not all assets possess this characteristic. Fortunately, those lacking liquidity can achieve it through a securitization process.
The role of securitization
Asset securitization, carried out by companies like FlexFunds, is a process that enables the conversion of an asset or a basket of assets into bankable assets.
This process allows for the creation of exchange-traded products (ETPs), known as “Flex” by FlexFunds, which have their own ISIN/CUSIP codes and can be traded from a regular brokerage account.
Thus, a hedge fund, a commodity portfolio, or even a real estate fund—typically illiquid assets—can be easily traded as if they were listed stocks or bonds.
Structured vehicles for liquidity
To achieve this liquidity, FlexFunds develops ETPs in the form of notes that are linked to and backed by the underlying asset portfolio.
As a result, the risk associated with the securities is tied solely to the assets on which the ETPs are issued. In other words, there is no impact on the rest of the business operations of the company involved.
To learn more about FlexFunds’ ETPs and our asset securitization program, feel free to contact our team of specialists. We’ll be glad to assist you!
Sources:
- https://balanz.com/balanz-university/que-es-la-liquidez
- https://www.investopedia.com/terms/l/liquidity.asp
- https://www.marcus.com/us/en/resources/saving/why-liquidity-is-important
- https://www.munich-business-school.de/en/l/business-studies-dictionary/financial-knowledge/liquidity
- https://www.investor.gov/introduction-investing/investing-basics/glossary/liquidity-or-marketability
- https://corporatefinanceinstitute.com/resources/accounting/liquid-asset
