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