Sponsored article
Moving on to CDI strategies To get from a traditional equity and gilt strategy to a CDI strategy, we would replace the equity allocation with a different (typically higher) allocation to fixed income assets held on a “buy and maintain” basis. This is illustrated below with the asset cashflows separated between gilts and non-gilts.
-4 -2 0 2 4 6 8
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 Year
Payment from gilt portfolio Non gilt bond income Non gilt bond redemptions Investment in gilt portfolio Data and calculations for illustration only Liability cashflows Source: Schroders
As with our previous example, the non-gilt portfolio does not need to match the liability cashflows. The gilt portfolio fills gaps and mops up excess asset inflows through reinvestment. Instead, as above, the non-gilt portfolio is designed to meet the client preferences in terms of risk profile and deliver the overall quantity of cash required without worrying about precise timing.
So what is so different about CDI?
Our cashflow diagrams have looked similar for our traditional strategy with planned equity disinvestment and our CDI strategy with various fixed income and redemption inflows. They are both expected to meet the liability cashflows as they fall due based on the assumptions made. The crucial difference between CDI and traditional “growth plus LDI” strategies is actually in the distinction between:
“assuming” the cashflows from dividends and planned disinvestments from the equity portfolio and “securing” cashflows from fixed income assets under a CDI approach.
Although this may sound like semantics, there are two important reasons why we make this distinction:
1) Parameter uncertainty – in particular knowing what the central scenario looks like 2) Market risk – the risk associated with disinvesting from the equity portfolio at unknown prices rather than relying on coupons and maturity proceeds from fixed income assets.
March 2019 portfolio institutional roundtable: CDI 23
Cashflow (£m)
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32
