For Lochiel Crafter, chief executive officer of the $18 billion Australian Reward Investment

Alliance (ARIA), the currency fall became “the biggest dislocation that I’ve seen in my investment career”. Combined with listed market declines and an increase in the movement of ARIA members to more conservative investment options, the “currency crunch” has resulted in the fund honing its liquidity management processes so it can counteract an array of market scenarios. Just as well. The prudential watchdog, the Australian Prudential Regulatory Authority (APRA), is concerned about super funds’ management of liquidity in the current environment.

Investment & Technology understands that APRA is visiting funds, requesting that they perform a series of stresstests and demanding that funds supply plans detailing how they would cope with 50 per cent, or even 100 per cent, liquidation. How would a fund find the cash, and how long would it take to provide it? An outright run on a fund by all members or total aversion of investment risk seems a remote possibility, but APRA’s exercises see super funds’ liquidity management capabilities tested to their absolute limits.

In this cash-starved market, funds’ management of available liquidity should be optimal. To date, APRA has generally been satisfied with its findings. In a statement addressing the liquidity tests, the regulator said that “while liquidity stresstesting could be enhanced in some cases, initial findings are that, in general, funds are alert to liquidity risks and are dealing with current market stresses proportionately”. Crafter defines liquidity management as a balance between a need for long-term investment returns and shortterm demands for cash, in order to accommodate members’ investment choices and to keep the fund operating.

At present, negative returns, currency hedging costs and responding to members’ investment decisions are the main influences on ARIA’s liquidity management processes. “Money’s been tight, but we’re not stressed in any way,” Crafter says, adding that the strategic integrity of the portfolio remains intact. “We’ve shifted to have a higher focus on short-term liquidity, but still have a fiveto- 10-year view of investment returns. We still have an unlisted assets program, and we still have a 25 per cent limit on how large it can be.” The main objective of liquidity management is clear. “We need to know how we will generate liquidity across the entire fund structure: where we can get it from, and how quickly we can get it,” he says.