The importance of holding liquidity is well understood by large institutions. But how much is enough? In the first part of Aviva Investors’ new article series on liquidity optimisation, Alastair Sewell investigates the key considerations for different investor types. Read this article to understand: the importance of sizing a liquidity portfolio correctly, and why institutions must consider “known” and “unknown” liquidity needs, the factors pension schemes, insurers, corporate treasuries and public institutions need to consider when sizing liquidity pools.

The amount of liquidity investors need to hold has come into greater focus in the wake of recent market events and regulatory changes. Regulators around the world are asking investors to hold more liquidity, or placing greater emphasis on existing rules.

Take money market funds (MMFs) – the most liquid of mutual fund categories – as an example. Since the global financial crisis of 2008-’09, regulation on MMFs has steadily increased, with US funds now subject to a minimum weekly liquid asset holding of 50 per cent of total assets. Market events such as the UK gilt-market dislocation of 2022, or the demise of Silicon Valley Bank (SVB) in 2023, have highlighted the potential for liquidity stress. Even for investors for whom these events were not directly material, parallels can be drawn: in liquidity terms, a bank run could be thought of as akin to a mass lapse event for an insurer, for example…

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