Cashflow Driven Investing

Delivering on the Defined Benefit pensions promise

Managing cashflow delivery effectively

Defined benefit (DB) schemes are maturing and the amount they need to pay out in benefits is therefore increasing.

As schemes mature, liquidity planning is becoming an important consideration, especially where the cashflow requirements represent a significant proportion of a scheme’s assets.

Many schemes now are cashflow negative or facing the prospect of becoming so in the next decade. This challenge, combined with ever-decreasing liquidity in credit markets and rising transaction costs, amidst regulatory changes, means that trustees are increasingly exploring the potential benefits of adopting cashflow driven investment (CDI) approaches.

 

What is cashflow driven investment (CDI)?

Cashflow driven investing is a long-term approach that seeks to help schemes increase certainty over their ability to meet both their future cashflow requirements and their funding objectives.

To generate predictable cashflows, CDI strategies select assets – like high quality corporate bonds - to provide stable, contractual income in line with the expected cashflow requirements of the pension fund.

Watch Asset TV’s CDI masterclass:

Benefits of cashflow driven investing

A successful CDI strategy is one that reliably delivers predictable cashflows with the aim of paying pension benefits.

According to our research, UK pension funds and their advisors see three main benefits of adopting a cashflow driven investment strategy1:

  1. Investing to support alignment with the scheme’s ‘endgame’
  2. Providing a cost-effective method of paying members’ pensions
  3. Reducing exposure to short-term market events

Many schemes, whether larger ones targeting self-sufficiency or smaller ones targeting buy-out and self-sufficiency1, are already turning to CDI solutions to help reduce the risk of becoming forced sellers of assets and to plan for their cashflow and endgame requirements.

Buy and Maintain Credit at the heart of our solutions

At the core of our CDI solutions is our long-term Buy and Maintain credit approach. 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:

  • Capital preservation – avoiding defaults and impairments
  • Predictability – delivery of cashflows over the long term
  • Credit returns – maximising the premium over gilts

 

Customising solutions to your needs.

Our CDI approach aims to meet pension schemes’ needs for intelligent, cost-effective ways to help secure their members’ benefits; providing a flexible, capital-efficient approach for managing pension payments and balance sheet volatility.

Recognising that each scheme is unique – size, funding level, risk appetite, covenant strength, endgame strategy – we partner with clients and their advisers to develop a solution aligned to schemes’ specific positions and aims, while retaining the flexibility to adapt to market conditions and any future changes in scheme objectives.

Investments involve risks, including the loss of capital.

“As pension funds mature, it is imperative that they focus on and define their endgame strategies. If a scheme has a self-sufficiency objective, as our research shows large numbers do, then ensuring that the cashflows are there when expected is vital. CDI can provide schemes of all sizes with the certainty they need to deliver on their long-term objectives.”
John Stainsby, Head of Client Group UK

 

Cashflow Driven Investing

Sebastien Proffit discusses the importance of CDI on the mallowstreet live panel

Our CDI client survey 2019

Research conducted by AXA IM and mallowstreet found that 52% of schemes are already adopting a cashflow strategy, with a further 21% considering doing so in the next 12 months.

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[1] Source: AXA IM 2019 CDI Survey in conjunction with Mallowstreet. 48 Pension Funds & 10 Consultants, representing over £1 trillion in assets. “Other” not included.

This page is for informational purposes only and does not constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services and should not be considered as a solicitation or as investment, legal or tax advice. The strategies discussed herein may not be available in all jurisdictions and/or to certain types of investors.

Opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. No guarantee, warranty, or representation is given as to the accuracy or completeness of this material. Reliance upon information in this material is at the sole discretion of the reader. This material does not contain sufficient information to support an investment decision.