Cashflow negative shift fuels new Henderson strategy launch

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Henderson Global Investors has launched a cash-flow driven investment strategy in response to the growing number of defined benefit (DB) pension schemes turning cash-flow negative.

The asset manager announced the launch yesterday, saying that it aims to help DB pension schemes meet their shorter-term (5-10 years) cash-flow requirements, “while avoiding selling down assets at inappropriate times or holding high cash balances”.

Henderson said the strategy could work alongside a liability-driven investment (LDI) mandate.

Colin Fleury, head of secured credit at Henderson, said: “By structuring a high yielding credit portfolio to redeem at regular intervals, it is possible to generate a reliable stream of cash-flow at an elevated yield.

“Fixed income asset classes, such as asset-backed securities, high yield [bonds], and secured loans, alongside more traditional investment grade bonds, can balance the need for yield with cash-flow certainty.”

He noted that different schemes have different needs and that the strategy “can be structured over varying time horizons, with varying distributions”.

The UK’s Office for National Statistics recently released data that has been said suggests UK pension funds could be reaching a “tipping point” into cash-flow negative status.

However, Tim Giles, head of investment consulting at Aon Hewitt, said pension schemes becoming cash-flow negative was “a bit of a red herring” for assessing the appropriateness of a cash-flow driven investment strategy.

“Total return is key, not how much cash it’s generating,” said Giles, arguing that a pension scheme’s funding target will increase if it has cash-flow matching investments and these deliver lower returns.

Cash-flow driven investment has always been important for pension schemes, he added. They have been implementing this approach for a number of years and will continue to do so.

Such a strategy can be “a sensible solution” for some schemes, Giles said, but trustees should “avoid being drawn into different types of products” and instead become clear on what their “end game” looks like.

“Increasingly, trustees are doing that,” he said.

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