portfolio institutional: How has Phoenix reacted to the performance of the financial markets in the past month, Anand? Anand Kwatra: There has been short-term volatility that may have some longer-term implications. However, it does not fundamen- tally change what we have to do, which is source long-term invest- ments to match our long-term liabilities. There may be a change in how we assess credit risk in those in- vestments. We are looking at our liquid portfolio and trying to as- sess which exposures may be prone to a default or downgrade risk, and then decide if any rebalancing or mitigation actions are required.


On the illiquid side, the opportunity set is being affected. Various deals are being postponed as issuers are tentative about coming to market. For example, we have seen that happen in the social hous- ing sector, which is a popular investment for matching long-term liabilities.


There is concern about liquidity in the corporate bond market. Can you buy those bonds at the prices you see on the screen? That is an issue. You are also seeing, in inverted commas, potential op- portunities. Spreads are widening in sectors that are often consid- ered relatively low risk, but you need to be cautious in this environment.


PI: Dinesh, are the schemes you work with approaching this envi- ronment with caution or as an opportunity as spreads are widening? Dinesh Visavadia: The schemes which are partway through their journey are saying, let’s pause before we take the next step until we get some stability in the market. Opportunities are rare, so we need to be selective in terms of whether we carry on with this strat- egy and complete it in a sensible way. We are not seeing new CDI strategies being implemented as it is not possible to buy all the investments needed to fully implement such a strategy. Trustees are naturally conservative with uncertainty and volatility.


PI: David, is the turbulence we have seen in recent weeks giving your cash-flow focused members less sleep than usual? David Weeks: To some extent, there is a generational aspect. Young- er trustees are looking for instruction from the regulator, whereas members who are longer in the tooth can look back to 1987 and understand that if you take a longer perspective and allow things to settle down then some of the immediate pressures will disappear. It is a quite volatile position at the moment, but the generational aspect may be a key element in how people respond to that.


PI: Claire, are asset owners concerned about liquidity at the moment?


8 April 2020 portfolio institutional roundtable: CDI


Claire Bews: There has been a significant impact on liquidity in the market during the current crisis. We are finding that brokers are taking much less risk onto their books. For my CDI clients who are well matched, liquidity is less of an issue as they shouldn’t be- come a forced seller. They should be able to sit back and watch this volatility and perhaps take advantage of it.


PI: Norbert, if schemes are well matched but the world is heading into a recession, as the IMF says it is, should those schemes be worried about default risk? Norbert Fullerton: The beauty of CDI is that you are not too worried about short-term market volatility because you are mainly invested long term in investment grade fixed income assets on a buy and maintain basis. If your cash-flows are reasonably well matched or over-matched you can ride this out.


It is more of a challenge for underfunded pension funds whose cash-flows are not that reasonably well matched. They are more ex- posed to market risk and they might need to sell assets to meet cash-flows. There may be opportunities to be nimble, if they can, to take advantage of widening credit spreads.


PI: Celene, what conversations are you having with your clients dur- ing such a turbulent time? Celene Lee: The conversations with those who are managing their CDI strategy are easier. Apart from understanding market volatili- ty and what has happened, they are in a good position. That said, we are seeing unprecedented amounts of cash demands which, to some extent, people have not anticipated. Employers are also switching off or deferring contributions, which is quite unusual.


This reinforces the need to be ready during normal times with a CDI strategy so that you are in a much better position to weather unexpected events or cash demands when we are going through turbulent times.


There is nothing like a turbulent market for people to realise that they need to manage cash-flow and liquidity better. People are aware that they need to do it, but not everyone buys into it until it happens.


PI: Kunal, how should cash-flow focused investors react to this tur- bulence if they are not well matched? Kunal Chavda: I have some concerns about BBB risk. Investors al- ready in CDI buy-and-maintain matching strategies need to en- gage with their managers to understand their position. One of the problems in the past couple of years has been that spreads have been incredibly tight, which has led to a lot of match- ing strategies to allocate a bit more to that BBB spectrum. It is not just BBB that is impacted by this; it is the entire invest- ment grade range. So whilst you are in a matched strategy and don’t need to worry about the market, the implications of what’s


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