Sorca Kelly-Scholte looks at the assets that can form the foundation of cashflow-driven investment strategies.
Speaking to Professional Pensions, J.P. Morgan Asset Management (JPMAM) head of EMEA pensions solutions & advisory Sorca Kelly-Scholte says many schemes are getting to the point where they are paying out more than they are receiving in contributions - becoming increasingly cashflow negative as they mature.
"Cashflow-driven investing aims to secure liquidity for payments while preserving the ability to generate return," she explains. "In today's environment where we are seeing low yields, pension plans need to start using principal payments on fixed income in order to generate the required cashflow as well."
Central to a CDI strategy, she says, is a buy-and-maintain, high quality credit type portfolio. To secure cashflow, JPMAM want to be using high quality credit, where they can be confident that they are capturing and delivering on that cashflow.
Kelly-Scholte explains: "In order to properly diversify the credit risk, and also to achieve yields and help to work towards those long-term return goals, you should also think about credit globally, rather than restrict it to the domestic market. The US credit market in particular just dwarfs the sterling credit markets and gives you much greater depth, liquidity and diversity in order to build these types of portfolios.
"After that, you're looking at income-generating assets and that will take you to more liquid types of credit. These include private lending, commercial mortgage loans, emerging market debt; high yield can be income generative, although you don't want to be relying on these assets for principal repayments."
Kelly-Scholte adds that all of these have a role in helping to deliver a base level of income that can go towards servicing cash flows. It's about finding the right balance and ensuring you're servicing the cash flow but also having capital to put into those long-term return opportunities.
Click here to find out more about the case for cashflow-driven investing at a time when most schemes are underfunded and need to grow their investment returns to meet future liabilities.