Balancing a securities lending program with the “appropriate liquidity profile” of the portfolio is a key skill for liquidity managers focused on collateral optimisation, according to Goldman Sachs-owned NN Investment Partners (NN IP).

Martin Aasly senior portfolio manager, investment solutions at NN IP, told Global Investor that collateral optimisation is an ongoing focus for them and that, if repo is the preferred liquidity channel, firms need effective ways to manage the related collateral.

Aasly said: “The collateral optimisation theme is one that we have been focusing on for a long time and so it is worth emphasising on the importance and potential of collateral yield strategies for any investor with relatively long-term collateral pools. Being able to balance a sophisticated securities lending program with the appropriate liquidity profile of the portfolio is a hallmark of a great liquidity manager. It requires all the tools in the toolbox.”

For example, if firms want to make the most out of their collateral lending strategies, they will have to take advantage of term trades, that is, a fixed maturity of one or three months, Aasly argues.

“This can double or triple your spread but is not possible if you don’t have a clear idea of the liquidity needs of the portfolio. Stress testing your portfolios for collateral requirements can be very valuable in this regard. We also often refer to a holistic approach to collateral and inventory management, referring to a function where the teams managing investment portfolios and the teams managing collateral activities (securities lending, repo, collateral trade support) are centralised and thus fully interconnected. This is a necessity to efficiently balance collateral requirements, cash funding and alpha generation, especially in today’s markets,” he added.

According to Aasly, securities financing technology vendors will see an uptick in demand.

“Let alone optimisation algorithms, simply managing portfolios and the inventory management that comes with using non-cash collateral can be far more complex in this environment than it has been in recent years of persistently low rates,” he said.

Goldman Sachs in April completed the acquisition of Dutch NN IP from NN Group. The deal, worth €1.7 billion (£1.42 billion), was initially announced in August last year.

NN IP in April said it manages €5 billion of assets in its green bond strategies and mandates.