Building a Better Portfolio: Balancing Performance and Liquidity - Executive Summary

4 Pages Posted: 11 Nov 2020 Last revised: 24 Mar 2021

Date Written: April 1, 2020

Abstract

Investors have been increasing their allocations to private assets seeking higher returns and better portfolio diversification. However, as this allocation increases, the liquidity characteristics of their portfolios change. To address this issue we create a framework that links bottom-up private asset investing with top-down asset allocation. Private asset cash flows are consistently modeled together with public asset returns and risk that, in turn, drive portfolio construction. This helps investors analyze how allocations to illiquid private assets, in combination with their commitment strategy, may affect their portfolio’s ability to respond to various liquidity demands. By measuring the potential tradeoff between asset allocations, total portfolio performance and the frequency of certain liquidity events with different severities, this framework can help investors quantify the interaction between their portfolio structure and performance, and formalize their decision making around portfolio liquidity choices.

Keywords: PGIM, PGIM IAS, PGIM Institutional Advisory & Solutions, PGIM Institutional Advisory & Solutions (IAS), portfolio construction, portfolio allocation, private assets, liquidity risk, asset allocation, commitment strategy, public market equivalent, Takahashi and Alexander, pacing strategy, PME

Suggested Citation

Shen, Junying and Li, Ding and Qiu, Grace (Tiantian) and Jeet, Vishv and Teng, Michelle and Wong, KC, Building a Better Portfolio: Balancing Performance and Liquidity - Executive Summary (April 1, 2020). Full Text Journal Article: "Asset Management and Private Market Investing,” The Journal of Portfolio Management Multi-Asset Special Issue 2021, 47 (4) 71-82 , DOI: https://doi.org/10.3905/jpm.2021.1.211, Available at SSRN: https://ssrn.com/abstract=3728662 or http://dx.doi.org/10.2139/ssrn.3728662

Junying Shen (Contact Author)

PGIM-IAS ( email )

Prudential Tower
655 Broad Street, 19th Floor
Newark, NJ 07102
United States

Ding Li

GIC Private Limited ( email )

168 Robinson Road
#37-01
Singapore, 068912
Singapore

Grace (Tiantian) Qiu

GIC ( email )

280 Park Avenue, 9th floor
New York, NY 10017
United States

Vishv Jeet

PGIM-IAS ( email )

Prudential Tower
655 Broad Street, 19th Floor
Newark, NJ 07102
United States

Michelle Teng

PGIM-IAS ( email )

Prudential Tower
655 Broad Street, 19th Floor
Newark, NJ 07102
United States

KC Wong

GIC ( email )

280 Park Avenue, 9th floor
New York, NY 10017
United States

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