If your cash-flows are reasonably well matched or over-matched you can ride this out. Norbert Fullerton, Janus Henderson


about. For example, we have seen spreads widen in the social housing sector, which was already on a potential downgrade trajec- tory. You could argue that those investments could deliver strong fundamentals over the long term and any short-term downgrade risk is now priced in.


PI: What assets are proving popular in CDI strategies? Visavadia: We can fit the entire spectrum of the liquid credit mar- ket in a buy and maintain strategy. It is just a question of what re- turn a scheme needs.


On the illiquid side, ground rents and infrastructure debt are the typical asset classes that I am seeing at the moment. Weeks: One of the issues concerning trustees, especially of small- er schemes, are unanticipated cash demands. One or two big puta- tive pensioners who want to transfer out can make a significant difference to the scale of things, so people are looking at the poten- tial timing of that. At the other end of the spectrum, trustees are nervous about prop- erty with funds potentially closing, the implications of what could be quite significant structural changes in the economy like the downgrading of the office and retail sectors. Kwatra: The build-up of property exposure has been commonly cit- ed in the insurance sector over the past couple of years. One way to mitigate that is ensuring appropriate diversification across as- sets like equity release, social housing, real estate, etc, because the property risk is going to come through in different ways and affect each investment slightly differently.


PI: That is an interesting point. Investors were buying real assets because they were told they could get good quality repeatable cash- flows. Now that there’s disruption in the markets, are those assets living up to the hype? Fullerton: On the real assets side, because you do not see daily fluc- tuation in liquidity levels, pension funds are holding them on a


10 April 2020 portfolio institutional roundtable: CDI


wait and see basis. They are investing for the long term. Some re- al assets, such as property, have suspended dealing due to uncer- tainty around valuations but are still providing income. One of the other things I have been seeing is some pension funds, because they don’t have the insurance regulation requirements, are taking slightly more risk and investing in, for example, high quality defensive equity income. Even though it’s not contractual income, there’s a long track record of reliable income coming through and it’s less volatile than the regular stock markets. So some pension funds are starting to invest in it. However, it’s too early to tell how this asset class will perform during this Covid crisis. Lee: It comes down to what asset classes count as CDI. The key word here is contractual. Apart from those running a low risk, almost quasi annuity book- type of pension scheme, many still rely on some degree of growth. It may not be equity type of growth but somewhere in between that and a hybrid asset. We have seen that in recent weeks, even some of the lower risk, private debt instruments that were going to distribute decided not to. So the key question is to what extent you can rely on the income being paid. That’s where schemes that rely on growth will have to allow for the fact that guaranteed income has a price to it. You can’t have a guarantee and very high returns. If you need a high level of certainty of income, then you are going to have a low return. That moves us into the spectrum of long-lease property. There will be times when contractual income may not be as con- tractual as people thought. That’s something you have to allow for and understand that even within a CDI strategy, there will be a mixture of assets. You cannot have your cake and eat it. Weeks: The balance changes between income guarantees on the one hand and a high return on the other. We may see some chang- es in that, and trustees will be keeping a close watch on what the trends are as they develop.


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