Cash-flow driven investing: Certainty of return


A final salary pension scheme pursuing a cash-flow driven investing (CDI) strategy is a sign of maturity, of independence and that it is standing on its own feet. Its sponsor has most probably stopped helping to boost its liquidity, so trustees are rely- ing on the scheme’s investment portfolio to meet their obligations. This focus on generating regular targeted cash-flow can give trustees a degree of cer- tainty that they will be able to pay their members’ benefits on time and in full, which is why pension schemes exist. For many, it is a more attractive proposition than the alter- native, which is to sell assets.


Investing to generate cash to pay members benefits is not a new concept, yet there is more to CDI than meeting next month’s payments. It also helps relatively well-funded mature schemes to position their portfolio towards its endgame, which could be a buy- out or joining a consolidation fund. CDI has become more interesting to institutional investors thanks to government debt and investment-grade corporate bonds offering depressed yields. Schemes are tak- ing more risk as they search for alternative assets that could provide the regular cash returns that they need.


An additional benefit of this strategy is that it diversifies portfolios through generating returns from various areas of the economy, such as lending directly to companies, investing in private businesses and property as well as roads, GP surgeries and wind farms. However, trustees will probably need to hold a certain level liquid assets, such as gilts and corporate bonds, as the endgame approaches to attract an insurer to take the scheme off their hands. It sounds straightforward, but large insurers have added an additional layer of complex- ity to the strategy. They are pitching for the same assets and the competition has seen returns in some areas fall while risks rise as investors fight to secure assets by agreeing less stringent terms. Direct lending is one such example where the term ‘cov-lite’ is typically mentioned. So CDI throws up several issues for the schemes using it to achieve an outcome. To debate these and to find out what trustees need to consider when setting such a strat- egy we brought asset owners, investment managers and an adviser together to discuss one of the hottest strategies in institutional investing today. You can read the result of our conversation from page 4.


Mark Dunne Editor, portfolio institutional


Contents


P4: Cash-flow driven investing roundtable


Asset owners, fund managers and an adviser discuss how CDI should be used by pension schemes.


P18: Passing the LDI baton to the new generation of CDI BNP Paribas AM’s Julien Halfon out- lines the case for using cash-flow driven investing strategies.


P20: Build your own annuity book with cash-flow matching solutions Jeremy Richards of M&G Investments looks at the benefits that planning for self sufficiency can bring.


P22: CDI: Certainly Delivering Inflows Schroders’ Jon Exley explains why CDI is about securing asset inflows not meeting assumed liability outflows.


P26: Feature: Why CDI?


Is CDI a way to avoid an expensive buy- out or is it just another three-letter gim- mick?


March 2019 portfolio institutional roundtable: CDI 3


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