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CDI STRATEGIES – NAVIGATING THE STORMS
Norbert Fullerton
Head of institutional client strategy, EMEA Janus Henderson Investors
The pandemic has hit us like a hurricane. Most countries have never seen this level of mass disruption and uncertainty — and few have lived through times like these. For me, the empty super- market shelves, bare streets and parks and sheltering at home are reminiscent of my childhood during the 1988 Category 5 Hurri- cane Gilbert in Jamaica. Gilbert caused widespread destruction to the Caribbean and the Gulf of Mexico and is the second worst trop- ical cyclone on record, behind Hurricane Wilma in 2005. One lesson I learnt, having survived tropical storms and hurri- canes, is that people are remarkably resilient. We find ways to adapt, thrive and rebound from adversity. Sometimes, it is even possible to find opportunities amid crises. As we navigate this crisis, how will trustees and sponsors of UK pension funds adapt and rebound from the turbulence? Are there opportunities available to ease the investment challenges?
How have CDI strategies fared so far?
The current crisis has revealed the efficacy of cash-flow driven investment (CDI) strategies. Many pension funds have continued to benefit from the greater certainty of returns and incoming cash- flows that these portfolios offer.
One of CDI’s main advantages is that trustees do not need to be overly concerned about short-term market volatility. Many of these strategies hold investment grade ‘buy-and-maintain’ corporate bonds, including ‘hybrid’ assets that have return-seeking and lia- bility-hedging characteristics. So, despite the recent credit spread widening, some defined benefit (DB) pension funds have not needed to sell assets to pay benefits during the market downturn. There is likely to be lower funding level volatility when liabilities have been calculated using discount rates that are consistent with a prudent assessment of yields on assets in their CDI portfolio. While it is too early to tell how significant this crisis will be, pen- sion funds with a strong governance process in place can be nim- ble and respond proactively to opportunities. Through their asset manager, in-house investment team or fiduciary manager, some could take advantage of new investment or reinvestment credit opportunities at relatively attractive prices. The DB pension funds that have not fared particularly well include cash-flow negative pension funds without CDI strategies that cover their income needs, those without downside equity protec- tion and those that have not been fully hedged in relation to inter- est rates and inflation.
16 April 2020 portfolio institutional roundtable: CDI
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