Insight Investment
October 26, 2017
Insight Investment is a global investment manager committed to a single goal: partnering with our clients to help them achieve their objectives with the greatest certainty

Cashflow-driven investing for growth?

Some people might associate cashflow-driven investing (cdi), which uses a fixed income asset portfolio to match liability cash flows, with investors who are willing to accept relatively modest returns in order to eliminate risk wherever possible. but a customized cdi approach can also be an appropriate strategy for liquidity-sensitive investors, like many pension plans, who are targeting strong asset returns

An increasing number of pension plans are recognizing that they are faced with a difficult situation. They need to allocate a large share of their investment portfolio to return-seeking assets in order to close a considerable funding gap over time. But these plans also have fairly predictable cash flow needs that are significant over the near term. Cashflow-driven investing could be the solution for such plans. Figure 1 illustrates the CDI approach used in conjunction with a strategy that includes a significant amount of return-seeking assets – as might be the case for an underfunded pension plan. An optimized portfolio of short-dated, high-quality fixed income assets are used to cover projected near-term pension payment liabilities. (Scheduled plan sponsor contributions could be incorporated into this projection as well.) Return-seeking assets are used to support longer-term liabilities.

In our opinion there are several significant benefits to a well designed and implemented CDI strategy:

The risk of a forced sale is greatly reduced. A CDI portfolio is designed to cover the near-term liquidity needs of the plan, including any projected cash flow shortfalls. This coverage minimizes the possibility of crystallizing poor short-term performance by selling the growth-oriented assets before they can deliver their desired results.

The investor can remain fully invested . Compared to using cash to address liquidity needs, a CDI portfolio’s fixed income instruments should yield higher returns. Note that for CDI mandates that cover longer (i.e. intermediate) cash flow projection periods, there is potential to add other, higher returning fixed income asset classes.

• Operating efficiency is improved. With buy/sell interventions minimized, processes are more streamlined and there is less administrative burden. Plan managers can focus their efforts on other important duties and opportunities.

Read the full article here: http://bit.ly/hvt-FI-p3 

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