Visavadia: The CDI strategy only came into the scenario not long ago. We have not been doing CDI in pensions for as long as insur- ers have. As schemes have matured and become better funded CDI was in- troduced to those on a route to buyout or buy-in. What has happened in the meantime is that the components that make up CDI strategies have become more sophisticated. This shows good innovation of the asset management industry. From a diversification standpoint, it is also proving challenging to estab- lish what a CDI strategy’s underlying risks are. That is a challenge that concerns me as a trustee.


PI: I do not associate equities with CDI, but some listed companies have been progressive dividend payers. Are equities being included in such strategies? Bews: Assets in CDI strategies should have contractual cash-flows, or as contractual as you can make them. Clearly, equities do not have contractual cash-flows and we are see- ing that now as dividends are being cut, not just by banks but across many sectors as companies are quite rightly conserving cash. There is no place for equities in a CDI strategy.


Kwatra: The whole point of a CDI strategy is to give you the cash- flows to pay your liabilities. This is why insurance regulation won’t allow equities to be held in an annuity fund.


When we see new investments with an equity-like component, we have to separate the equity component from the fixed cash-flow component. We are only allowed to hold the fixed cash-flow com- ponent within the annuity fund, while the equity-like risk must be held somewhere else.


PI: Should CDI assets be in the public or private markets? Bews: Private assets generally have contractual cash-flows. They can bring benefits that are not available on public markets. Re- turns here have been coming down, but they can offer higher yields for lower risk. Many people have mentioned the difficulty in investing for cash- flow at the long end of the markets and private assets allow you to add some diversification there. In the public markets there are fewer issuers issuing for 30 or 40 years. Chavda: It also depends on the ability of schemes to access those investments on the private spectrum. Larger schemes have the governance budgets and the ability to take on those strategies, smaller schemes don’t, necessarily.


There has been the introduction of liquid versions of private asset vehicles, which can be accessed by smaller schemes. But these are still early days.


Long duration assets like infrastructure debt, for example, can help pad out long-dated liabilities mixed with medium and short- term matching through public markets. Don’t forget that there is a lot of diversification through the fixed income spectrum if you are looking at the entire asset class’ avail- ability through multi-asset class approaches. So there is a lot avail- able to schemes. Fullerton: There is a wide spectrum in public and private assets. On the public side, global fixed income is a broad, deep and wide market so there are more than enough asset classes to provide diversification.


I have held many conversations with trustees over the past couple years where they have been struggling to find assets at the right price that generate income. Defensive equity income has helped to provide some ‘alternative’ income. Whether this asset class quali- fies as CDI or just a part of their wider portfolio is something to be debated.


Fundamental research is crucial right now. Claire Bews, M&G Investments


12 April 2020 portfolio institutional roundtable: CDI


When you are fully funded and fully matched, you want a low risk strategy. Having a good diversified mix of assets that produce con- tractual income is the portfolio you need across private and public sectors. Lee: When we think about what goes into the CDI box, there will be varying degrees of opinion and different shades of contractual income, such as the traditional buy maintain credit and the long- lease property-type assets, for example. One of the things we find


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