Cashflow Driven Investing
CDI is changing the defined benefit pensions investment landscape.
What is Cashflow driven investing (CDI)?
Cashflow driven investing (CDI) strategies are designed to provide a regular income stream from bond coupons and maturities to help address a pension fund’s income requirements.
They aim to reduce the risk of being a forced seller at depressed prices to pay cashflows by ensuring that the natural income from investments can be used to pay the outflows.
Why use a CDI strategy
- Risk reduction - Investing with a focus on expected cashflow requirements has the benefit of reducing both sequencing risk (the risk of being forced to sell assets at depressed prices) and re-investment risk (being forced to lock-in lower expected returns if yields and/or spreads have reduced since the initial investment).
- Capital growth – CDI strategies typically invest in assets that provide a spread over government bonds. That spread can offer pension funds with opportunities for capital growth over time.
- Liquidity – Most CDI strategies are highly liquid, giving funds flexibility to adapt as their needs change. This could be to fund collateral calls, make changes to the CDI portfolio itself (e.g. re-risking or de-risking), or enact a risk-transfer to an insurer.
- Hedging – In addition to liquidity, CDI portfolios often provide a degree of hedging – both of existing liabilities through interest rate exposure, and to match the potential pricing of insurers providing risk transfers.
- Sustainability - There are a range of methods to integrate sustainability criteria in credit-heavy CDI portfolios, ranging from ESG-integration to Net Zero alignment. The strategic importance and time horizon for CDI strategies often mirrors timeframes around which sustainability objectives are to be achieved.
CDI solutions are exposed to the same risks as the underlying asset classes they are invested in. For example, a pure 100% investment grade portfolio will have the same risks (credit, interest rate, liquidity, etc) as a traditional investment grade credit portfolio.
Through decades of fixed income and CDI experience, we have developed a robust and holistic approach to risk monitoring and management within the CDI portfolios we manage on behalf of clients.
Time for CDI
Rob Price, senior portfolio manager for fixed income, outlines the potential benefits of cashflow-driven investment strategies for pension funds.
Read the insightWhat does a CDI strategy look like?
The structure and holdings within CDI strategies can vary hugely between different client portfolios and therefore there is no one-size-fits-all approach.
Having said that, there are a few common factors to any CDI portfolio:
- Core credit allocation - All CDI portfolios that we manage have a meaningful allocation (60% to 100%) to investment grade credit. This is a core allocation, with other fixed income asset classes also contributing towards the five key considerations of a CDI portfolio noted above.
- Investment style – Most CDI portfolios are managed in a ‘buy and maintain’ style, meaning that bonds are held for the long term with the aim of keeping turnover levels to a minimum.
- Home bias – To avoid currency hedging costs and collateral calls, and to help towards any liability hedging, many CDI portfolios have a home bias - in other words, they invest predominantly in the local currency of the pension fund.
Customised solutions to meet your needs
Our buy and maintain credit approach is a fundamentals-based, investment grade credit solution with built-in environmental, social and governance (ESG) factor analysis. It aims to maximise the security of clients’ future cashflows through:
- Conservative construction – avoiding defaults and impairments
- Predictability – delivery of cashflows over the long term
- Credit returns – maximising the premium over sovereign debt
Our cashflow driven investing approach aims to meet pension schemes’ needs for intelligent, cost-effective ways to help secure their members’ benefits by providing a flexible, capital-efficient approach for managing pension payments and balance sheet volatility.
The most important element for us is building partnerships with our clients to ensure that the strategy and service meet their needs. By doing so, we aim to develop a solution aligned to a pension fund’s specific positions and aims, while retaining the flexibility to adapt to market conditions and any future changes in objectives.
We are an award-winning leader in cashflow driven investing
In the UK we have been named CDI Manager of the Year for three years running at the prestigious UK Pensions Awards.
References to awards are not an indicator of future performance or awards.
Buy and Maintain Credit Webinar: Through the gilts crisis and beyond
Gilt trip: Lessons for institutional credit investors from a UK liquidity crisis
The role of credit in the new UK pensions landscape
Addressing climate change: How to integrate climate into your cashflow driven strategy
Risks considerations for this strategy:
- Market risk and risk of loss of invested capital
- Risks associated with fixed income securities, including, but not limited to, interest rate risk, credit risk and liquidity risks
- Risks linked to global investments
Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested.
Disclaimer
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Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.