Cashflow driven investment (CDI)
Many institutional investors are shifting their investment focus as they become net cashflow negative – meaning they are paying out more than they receive from their investments or plan sponsors.
Being cashflow negative has given rise to new challenges and new techniques. In particular, regardless of their level of funding, plans can no longer simply focus on the longer-term returns that can be generated by their assets – short-term liquidity also needs to be managed to avoid being thrown off course.
These trends mean that for many investors, the investment problem has changed from one of accumulation to one of decumulation. Addressing this challenge is leading them to seek investment strategies that aim to generate adequate cashflows to cover liability payments over finite timescales with greater certainty, while in the case of underfunded plans, retaining potential for growth assets to generate meaningful returns.
The changing focus for many institutional investors
Source: Insight Investment.
Being cashflow negative, and a shifting focus to generating cashflows over a finite timescale, has significant implications:
- Shorter timeframe to generate returns required
- Greater requirement to manage forced-selling risk
- Tailored portfolios more appropriate than index exposure
What is a CDI solution?
A CDI solution typically aims to address these challenges by constructing a portfolio of assets that generate contractually-defined cashflows that reflect an investor’s required cashflows, through income and/or maturing assets. We believe high-quality investment grade corporate credit and other ‘contractual assets’ will play a central role in such a solution.
A CDI approach can be used to manage near-term liquidity needs and enhance portfolio returns. It can also be an important component of a liability-hedging program with an objective to reduce sensitivities to forced-selling risks and the timing of returns, and/or be deployed in conjunction with a long-duration or overlay strategy.
Broadly speaking, the three potential benefits of CDI strategies are:
- Secure returns with greater certainty
- Generate cashflows required to pay obligations
- Reduce mismatch risk
CDI strategies can potentially help investors to achieve their objectives with greater certainty, both in relation to paying obligations as they fall due and achieving long-term funding outcomes.
Implementation considerations for investors
We believe an effective CDI solution will have four key characteristics that investors should take into account when implementing their strategy.
- Access to a broad fixed income opportunity set
- Balance flexibility and cashflow-matching precision
- Rigorous portfolio construction and credit risk-management techniques
- Address an investor’s specific needs
How Insight can help build a CDI solution
Investors seeking to implement a CDI approach will potentially benefit from input provided by an experienced investment manager. Insight specializes in bespoke risk-management solutions designed to meet individual clients’ needs. We also offer long-established expertise across global credit markets.
As of December 31, 2018.* Assets under management (AUM) are represented by the value of cash securities and other economic exposures, and are calculated on a gross notional basis. Assets managed by our fixed income and financial solutions groups include clients who have liability driven investment, fixed income and cashflow-aware strategies.
*Insight North America (INA) is part of “Insight” or “Insight Investment”, the corporate brand for certain asset management companies operated by Insight Investment Management Limited including, among others, Insight Investment Management (Global) Limited and Insight Investment International Limited. Advisory services referenced herein are available in the US only through INA. Figures shown in USD. FX rates as per WM Reuters 4pm spot rates.
Includes employees of Insight North America LLC (INA) and its affiliates, which provide asset management services as part of Insight, the corporate brand for certain companies operated by Insight Investment Management Limited (IIML).
1Assets for which investors have a contractual claim.
2Insight ranks first for Overall LDI Quality for the eighth consecutive year and first for Overall Fixed Income Quality for the fifth consecutive year based on Greenwich Associates 2018 UK Investment Consultant Research. Source: Greenwich Associates 2018, GICF FI-18 fixed income overall. Results are based on interviews with 13 UK consultant firms evaluating fixed income managers. Greenwich Quality Index Overall is a composite of Investment and Service scores. The GQI scores presented above were given to Insight Investment Management (Global) Limited, an affiliate company of Insight North America and Insight Investment International Limited. This strategy is offered in the US by Insight and will be managed by the same investment team that received the GQI scores presented above. Insight Investment Management (Global) Limited paid a fee to Greenwich for access to the GQI scores and research underlying the scores. GQI scores may not be representative of any one client’s experience and do not indicate any level of skill or future performance.
Past performance is not a guide to future performance. Investment in this strategy involves substantial risk of loss. The value of investments and the income from them can fall as well as rise and are not guaranteed, investors may not get back the original amount invested.
Please note: the value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance.
Insight North America LLC (INA) is a registered investment adviser under the Investment Advisers Act of 1940 and regulated by the US Securities and Exchange Commission. INA is part of “Insight” or “Insight Investment”, the corporate brand for certain asset management companies operated by Insight Investment Management Limited including, among others, Insight Investment Management (Global) Limited and Insight Investment International Limited. Insight’s assets under management are represented by the value of cash securities and other economic exposures, and are calculated on a gross notional basis. Advisory services referenced herein are available in the US only through INA.
The views herein represent the opinions of Insight and are subject to change based on subsequent developments. They are not intended as investment advice or to predict or depict the performance of any investment. The material contained herein is not intended to provide, and should not be relied on for, investment, accounting or legal tax advice. Further, this material does not constitute a recommendation to buy, sell or hold any security. No offer or solicitation for the sale of any security or financial instrument is made hereby.