Echoes: How to adapt when liquidity dries up overnight

Philippe Berthelot, CIO for Credit and Money Markets at Ostrum AM, has weathered several crises during his 30-plus year career, and the profound importance of liquidity when managing a bond fund is something that has stayed with him long after the GFC.

In the past 25 years, has there been a singular event that you would say has had a significant impact on you, your management style and general way of thinking about investing?

Philippe Berthelot PB: The global financial crisis [GFC], without a doubt. It was a crisis of unprecedented magnitude that very few people had anticipated. Events like this require an immediate and rapid response from policymakers, as was the case after the collapse of Lehman Brothers. Otherwise, the conditions were there for another Great Depression – the period after the market crash in 1929, which saw high unemployment, cratering industrial production and widespread failures across banks and business. Fortunately, in 2009, after the initial shock, we were able to avoid the worst.

Following the GFC, we saw greater regulation of the banking sector, particularly in Europe, and better monitoring of debt levels. It’s important to remember that the high levels of leverage that were in the system have fallen dramatically since the GFC. We now live in a different environment, one that is certainly more reassuring, but also subject to more restrictive regulations. That is the price we have to pay for greater stability in the banking sector.

Do you think that the regulatory changes following the GFC went too far?

PB: I think increasing the level of equity capital for European banks was necessary. It was important to restore the confidence of money market and bond investors in the banking system. Banks are an important source of financing for the European economy. Stronger regulation was probably a necessary evil.

Finding the right balance in terms of regulation is difficult, as it is easy to go from good regulation to over-regulation. Nevertheless, increasingly stringent regulatory requirements, in terms of reporting for instance, have not made life easy for the asset management industry – and portfolio managers in particular. That is the flip side of the coin.

Was there a defining moment during the GFC when you realised the magnitude of the event?

PB: Liquidity in markets suddenly dried up. It was incredible and indelible. I was working at Axa Investment Managers in Paris at the time and noticed that our American colleagues had a much better grasp of liquidity than we did, thanks to their ‘TRACE’ system. There was no equivalent to their tool in Europe. Our measurement tools on this side of the Atlantic were much more basic.

As you might expect, they have improved since then with the use, among others, of the LCS [Liquidity Cost Score] tool in Europe. Today, a bond manager must be able to measure the degree of liquidity of the securities in their portfolio, using reliable external tools and data.

But the lesson was clear – and remains an important one: liquidity can disappear overnight. Now, we are active managers and we take into account the cost of portfolio turnover in our investment process. Liquidity, which has an impact in terms of cost, must be accurately measured before proceeding with portfolio turnover. That’s why an active manager such as Ostrum AM cannot afford to turnover its portfolio too frequently.

Today, there are many sources of uncertainty: whether it’s the concentration of the S&P 500, high public debt, geopolitical unpredictability or the rise of populism. Is there one issue that worries you more than others – and is this environment markedly different from any you have experienced before?

PB: What concerns me most today is the impact of artificial intelligence [AI] on stock market valuations and the economy. ChatGPT was launched three years ago and we are already on the fifth version. Certain uses of AI, such as the creation of fake images or videos, really do worry me.

Our analysis is based on the use of reliable data. But if AI alters the information on which we base our investment decisions, it changes a lot of things. It can distort our perception of reality. An investment scenario is built on reliable data produced by an independent entity, not on perceptions that may be biased. That’s why, in my opinion, AI needs to be better regulated.

But I appreciate AI can be perceived in many ways: it can be seen as a source of opportunities that allow us to save time and be more efficient and productive, but it can also be interpreted as a Pandora's box – and once opened, there’s no turning back.

Recent crises, like Covid, have forced central banks to use unprecedented crisis response tools that were previously absent from academic textbooks. How do you explain to younger analysts in your teams what life was really like for a bond portfolio manager in the past?

PB: The pandemic was a baptism of fire for new entrants to the financial sector. They realised that markets did not only go up, but could also go down, with potentially significant frequency and amplitude. This came as a surprise to many.

But we always learn lessons from market shocks. When dealing with crises of the magnitude of the GFC or Covid, relying on experienced managers with decades of experience can make all the difference.

I’m not the traditional Frenchman, who tends to be obsessed with mathematics. But the lesson from the GFC in particular is that, overnight, there could be changes to your VaR [value at risk] – which is your potential loss in a bond portfolio over time – and your tracking error – or measure of the active risk in the portfolio that is due to your active management decisions relative to your benchmark. So, you’ve done nothing of influence as a portfolio manager – it is simply because volatility has skyrocketed, correlations have drastically evolved and the environment for the level of liquidity has changed suddenly.

That’s why you need a balance in your team. It’s important to also have engineers and actuaries who can interrogate the numbers, the VaR and the tracking error, but likewise, interrogating the data and applying learned experienced of situations is also very well appreciated and can make all the difference – especially when it comes to stressful situations involving whipsawing volatility or falling performance.

Would you say the behaviour of central banks since the GFC has fundamentally changed investor perceptions of risk? 

PB: The intervention of central banks, particularly during the sovereign debt crisis in Europe from 2011, has resulted in very low, even negative, interest rates. Their actions have distorted market perceptions and artificially contained volatility. The timing and scale of central banks' response to these market shocks determine their success. A response that is too late or too aggressive can have very painful financial consequences.

What’s your one piece of advice for someone starting their career in fixed income investing today?

PB: It’s always important to remain pragmatic. Managing a bond portfolio today requires taking both financial and non-financial aspects into account. This dual approach is necessary and, nowadays, virtually mandatory. Within the ESG [Environmental, Social, Governance] criteria, the E and S are relatively recent, compared to the governance criterion. That’s why we need to make sure we can rely on the real, factual and objective data. And this is where AI comes into play.

Interviewed in November 2025