Mijakowska: How you account for transfers is an important and valid question. It is one of many sources of cash-flow that is not related to your usual pension payments. The sterling market’s not big enough so you hold overseas bonds, which you need to hedge. You might also have a collateral call on your LDI. We would advocate solutions where you have too much cash-flow at the front-end to account for trans- fers out, FX hedging or collateral calls. If that risk doesn’t materialise, then you have too much cash. That’s not a bad problem to have. Exley: You can link transfer value basis to your assets. So essentially your transfer values are linked to interest rates and you can even link them to credit spreads. So it shouldn’t have any impact on the solu- tion because the transfer values you pay out should be the value of the assets you are holding against that liability.


PI: What problems do investors face when trying to implement synthetic strategies? Halfon: It comes back to the point that if you don’t have much time you face a lot of competition to acquire illiquid credit assets at ordinary value. If you decide to invest everything now you are going to buy whatever there is, which is not a good idea; spreads will be of bad quality and you are not going to get good assets. If you want to take time to invest into what you need, you have two choices; either you don’t invest and you keep your assets in equities, but you don’t get the exposure to the asset classes that you would like to have. Or you could structure your CDI portfolio along the lines of what you would like to have, for example, 30% of infrastructure and 40% of real estate debt, by finding the equivalent in the illiquid or synthetic world. You can use listed-corporate bonds. As you go along and the right CDI assets become available, you transfer from listed or synthetic CDI assets into illiquid assets. You are swapping the right exposure in something which is liquid for something which is illiquid, in doing so you are capturing the illiquidity premium.


It is good to have a lot of cash, but it may not be optimal from pure risk, cash-flow matching or liquid- ity perspectives. So you will have to restructure your portfolio along the line of your CDI in the future by starting to at least get into the right type of assets. Greaves: If you are buying illiquid assets over time because you can’t get enough exposure to things that offer good risk-adjusted returns, buying liquid proxies might also lock you into poor risk-adjusted returns. You are matching a risk factor you maybe do not care about. The asset allocation choice might not be the motivation for buying those assets. It is important to have as wide a universe as possi- ble when you are building holding portfolios or liquid proxies because essentially you are trying to get a similar risk-adjusted return profile, not necessarily the same asset class exposure. Halfon: There is an order of priority, a pecking order. If you find the asset you want, invest in it, if not try to find something with a similar risk-return. In the end you will realise that if you can’t find infrastructure debt you have probably no chance of finding good real estate debt. There is a shortage of good illiquid credit. That is why if you start to look from the high- est priority to the second or third best you end up with something liquid in most cases.


John Greaves


12 March 2019 portfolio institutional roundtable: CDI


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