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:
- Investing to support alignment with the scheme’s ‘endgame’
- Providing a cost-effective method of paying members’ pensions
- 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.
Buy & Maintain Credit Market Updates
B&M Strategy Update. How credit trading dynamics adapted to the COVID-19 crisis
The UK has moved past the peak in new daily COVID-19 cases and in the death rate, which has allowed some easing of restrictions, but the UK is not typical in Europe and has seen a relatively protract ...
Buy & Maintain Credit Update No3: Bumpy credit markets offer value for long-term cashflow portfolios
The COVID-19 crisis is focusing minds on the fallout in corporate credit markets. Monetary and fiscal policies remain highly supportive across regions, pushing spreads tighter since the peak of the c ...
Buy & Maintain Credit Market Update
Corporate credit has weathered an initial shock thanks in large part to decisive intervention from central banks.
A turbulent year has delivered valuable lessons for the future of cashflow driven investing
COVID-19 has been a huge shock. Trustees have watched as risk-assets tumbled, then recovered, then looked fragile once again. And as asset prices saw downward pressure, so the monetary policy respons ...
How ESG can help build resilience in Buy and Maintain credit strategies
Responsible investment has always been about the long term. Equity investors want to know a company isn’t vulnerable to global shifts around environmental or social issues and fixed income investors, ...
Cashflow and liability driven investing – why you need to separate the two
Effectively managing cashflow and liquidity challenges is becoming increasingly vital for many institutional investors, something which has led to the rising popularity of cashflow driven investing ( ...
 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.