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Over the past few years, a strategy that has been a vital tool to the insurance industry has been trans- ported to the pension sector: cash-flow driven investing (CDI). As some of the largest investors around, with considerable, regular outlays to claimants, insurers need to have cash readily available.
Initially, some of the tools that were offered to pension investors were direct copies of those in the insur- ance sector and overlooked the nuance of differences between the two. Today, the next generation of CDI strategies have been tailored to focus on the needs of maturing pension funds with benefit payments to make.
These strategies make use of a growing number of illiquid fixed income instruments that can work alongside what is already held in an LDI portfolio. Despite moving towards their endgame, pension funds are still long-term investors compared to other market participants and can benefit from an illiquidity premium that others cannot.
Many of the illiquid assets that make up the new generation of CDI are often well-protected by cov- enants, with income linked to inflation and a relatively low default rate.
Being valued less frequently than bonds in the corporate credit market, debt from infrastructure, social housing and some asset-backed securities reduce volatility in pension fund portfolios, while providing a regular income that is higher than that paid by gilts. Unlike equity investments in these sectors, debt matures, returning cash to the lender rather than having to find a buyer for the asset.
CDI is not a full-portfolio solution, but it can work alongside other strategies to help achieve pension funds’ payment needs without resorting to a costly buy-out.
LDI has helped many pension funds reach the home straight – now it is time to hand the baton to CDI to finish the race.
BNP PARIBAS ASSET MANAGEMENT UK Limited, “the investment management company”, is authorised and regulated by the Financial Conduct Authority. Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom. This material is issued and has been prepared by the investment management company. This material is produced for information purposes only and does not constitute: 1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Opinions included in this material constitute the judgment of the investment management company at the time specified and may be subject to change without notice. The investment management company is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio. Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material. This document is directed only at person(s) who have professional experience in matters relating to investments (“relevant persons”). Any investment or investment activity to which this document relates is available only to and will be engaged in only with Professional Clients as defined in the rules of the Financial Conduct Authority. Any person who is not a relevant person should not act or rely on this document or any of its contents. All information referred to in the present document is available on
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March 2019 portfolio institutional roundtable: CDI 19
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