Building blocks: investing for cashflow using corporate credit


As defined benefit pension schemes draw closer to maturity, there is an increasing need to invest for cashflow to meet pensioner payrolls. As such, fixed income strategies are evolving, offering hold-to-maturity investments managed for coupon income that can use a broad spectrum of public and private assets to help pension schemes deliver the predictable, scheduled and secure cashflows that they require.

When investing for cashflows, investors can explore a full range of markets and asset types. The key is an outcome-oriented approach, with a focus on specific yield, duration or cashflow targets. This is a similar model to how annuity funds invest. There are several strategies that focus on creating high-quality, predictable cashflows, including:

  • Taking a ‘buy and maintain’ approach to public bonds – this approach uses high-quality, liquid corporate bonds to deliver an income from a diversified portfolio of a 100-150 different positions.
  • Capitalising on the illiquidity premium of private assets – this approach uses private assets and capitalises on higher levels of income, enhanced information flows and robust structural protections to compensate investors for the lack of liquidity (the ability to sell at a good price at any time). This is known as the illiquidity premium. These assets can offer long-dated maturities, often with explicit inflation linkage, to provide a steady, contractual income stream.

Investing for cashflow offers flexibility in the construction of an institutional portfolio, with the ability to combine investment opportunities depending on the client’s required cashflow profile and credit quality.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

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