Cashflow driven investing
Cashflow-driven investing (CDI) strategies are designed to provide a regular income stream from liquid and illiquid fixed income assets, both coupons and redemptions, to help address a pension fund’s income requirements.
They aim to reduce the risk of being a forced seller of growth assets at depressed prices to pay cashflows by ensuring that the natural income from investments can be used to pay the outflows.
The opportunity
- Risk management – Investing with a focus on expected cashflow requirements can reduce both the risk of being a forced seller during down markets, and of locking-in lower yields and/or spreads when reinvesting.
- Capital growth – CDI strategies typically invest in assets that provide a spread over government bonds, bringing opportunities for capital growth over time.
- Liquidity – CDI strategies vary from highly liquid to partially illiquid, giving funds flexibility to adapt as their needs change.
- Hedging – CDI portfolios often provide a degree of hedging for liabilities through interest rate exposure, and to match the potential pricing of insurers providing risk transfers on the case of defined benefit pension liabilities.
Our expertise
Fundamentals-based approach
Our credit approach is a fundamentals-based, investment grade credit and investment grade equivalent 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 cash or sovereign debt.
Cost efficient
We seek to minimise organisation and trading costs by focusing our trades on fundamental concerns, responsible investment breaches or extreme valuation circumstances. Access to our own Tier 1 trading and alternative platforms helps to further reduce costs.
Collaborative
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.
What 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. However, 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.
Learn more about our Carbon Transition core credit strategy.
-
Buy and maintain 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.
Learn more about our Buy and Maintain strategy. -
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.
Learn more about our sterling credit funds on our Fund Centre.
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.
Investment risks
- 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.
Important information
Marketing communication. For professional investors only.
Past performance or achievement is not indicative of current or future performance. Performance is calculated net of fees unless otherwise stated.
Any views expressed here are those of the author as of the date of publication, based on available information, and subject to change without notice. This material does not constitute investment advice.
Investments are subject to market fluctuations and the risks inherent in investments in securities. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial investment. There is no guarantee that the performance objective will be achieved.
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.