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Industry Voice: CDI - Certainly Delivering Inflows

clock • 2 min read

Although the focus of CDI is often on meeting assumed liability outflows, in reality it is all about securing the asset inflows.

One of the reasons why Cashflow Driven Investment (CDI) gains attention is that it benefits from a simple and intuitive explanation around arranging assets to meet liability outgo. However, this simple explanation alone doesn't really distinguish CDI from many other pension fund investment strategies. After all, the investment objective of nearly every pension fund is to "meet the liabilities as they fall due".

As a result, the simple explanation is easily critiqued. Unfortunately, this can deflect focus away from the real benefits of CDI as an investment strategy, which is the greater certainty of asset inflows. Liability driven investment (LDI) then complements CDI by matching liability outgo.

Traditional example of meeting liability cashflows

Let's start with a traditional investment strategy consisting of equities and gilts. Importantly we will ignore risk initially and just work in terms of an expected outcome. To generate a strategy which is expected to "meet the liabilities as they fall due", we apply an equity allocation strategy which disinvests uniformly over 20 years. Based on assumed equity and gilt returns, all of the liabilities are paid as they fall due out of the projected fund without running out of money for a typical scheme shown below in Figure 1:

Figure1.JPG

 

Watch our video "Is cashflow investing different to LDI?" below

 

 

Important information:

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Schroders has expressed its own views in this document and these may change. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. CS1525b

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