IKS-RUSSIA

Luis Viceira, George E. Bates Professor of Business Administration at Harvard Business School, interviewed by Brendan Maton, financial journalist.

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Is the real lesson from this crisis that liquidity was the big problem? Liquidity was not the only problem. But I think a lesson that investors have to derive from this crisis is that it is very important to be aware of what your liquidity situation or the liquidity situation of your portfolio is at any given point in time. I think some investors have learned the hard way that it is not the same thing to invest in an equity vehicle that is liquid versus an equity vehicle that is illiquid. And if you also have an illiquid portfolio and are going to have to sell it into an illiquid market, as has been the situation for many investors in the current crisis, then you yourself are going to find that you need to sell your assets at a time when you are not going to find buyers who are willing to maybe buy those assets at what you think should be the fair value of those assets. This leads to forced sales. And that leads to big losses for the investors who are forced to sell. So I think what prompted the crisis were obviously fundamental factors, and that one of the consequences is that those investors who had not properly thought through the liquidity exposures in their portfolios were among the investors who suffered the heaviest losses, or who were in the worst situation in this crisis. So yes, I think one of the big lessons from the crisis – and I think the investors are taking notes – especially for institutional investors, is how to think more carefully about whether you are long or short liquidity. And it seems like being short liquidity a little bit too much can have disastrous effects in a situation such as the one we lived through at the end of 2008 and the beginning of 2009. Yes. We have seen a lot of famous investors with fairly illiquid portfolios (real assets, but illiquid portfolios) lose a lot of money. Do you think that this type of investor, like the Yale Endowment Foundation, remain a good model or is the model in need of change? The model remains a model to think carefully about. I do not think they are going to change their model. I think essentially their model is sound, a model based on diversification across asset classes. It is a model where, as a long-term investor, you think carefully about whether you can assume some illiquidity. As I said before, liquidity is important. But you need to calibrate depending on your needs how much illiquidity you can assume. And certainly these investors have been liquidity providers in the past, and I think they are going to continue doing so, because they can afford to do so, given their long-term investment horizon. Now, what we are going to have to think more about is – what is the risk exposure that we have in these portfolios? One way in which investors are going to start thinking more carefully – maybe these are too limited or simplistic interpretations of what they do – is to think: I am going to invest a fixed proportion in certain asset classes that are going to be defined in a very rigid way, and I am going to invest 10% in this package, 5% in that package, and these will always be invested in that way. I think that is not exactly what they do in practice; that is the way it has been interpreted popularly. And that way of investing might be a little bit misleading. Because we have a lot of overlapping in the risk exposure of some of these asset classes, and when you do not think through the veil of the asset class, and go a little bit beyond that, you think more deeply about the risk exposure. That is what I think investors are going to start thinking about. And thinking about what fundamental risk is relevant to me as an investor, and then what kind of exposure do I want to have to those risks, or dealing