Market Research
Overcoming the denominator effect challenge
November 10, 2022
The sharp fall in public markets since the beginning of 2022 means many investors are now experiencing the challenge of the denominator effect.
Suddenly, they are over invested in illiquid assets like real estate and infrastructure. Given that many investors are constrained by strict asset allocation ranges set by their investment committee or trustee board, they now need to make urgent decisions. Should they divest from private market assets to maintain their desired liquidity? Or should they find alternative ways to achieve this? If they do decide to reduce their private market assets, how should they set about it and what are the risks?
In this article, we consider the lessons that can be learnt from history about the denominator effect, look at ways in which investors can add liquidity to their portfolios without divesting from their private assets and offer suggestions for those considering rebalancing their portfolios.
Suddenly, they are over invested in illiquid assets like real estate and infrastructure. Given that many investors are constrained by strict asset allocation ranges set by their investment committee or trustee board, they now need to make urgent decisions. Should they divest from private market assets to maintain their desired liquidity? Or should they find alternative ways to achieve this? If they do decide to reduce their private market assets, how should they set about it and what are the risks?
In this article, we consider the lessons that can be learnt from history about the denominator effect, look at ways in which investors can add liquidity to their portfolios without divesting from their private assets and offer suggestions for those considering rebalancing their portfolios.