Cash-flow driven investing

Certainty of return.

April 2019

Read full roundtable
portfolio institutional: How important is cash-flow driven investing (CDI) to asset owners?

Chetan Ghosh: We are heavy users of CDI assets. In 2011 we started building an allocation to longdated assets that had secure, largely inflation-linked, contractual income. That now forms 11% of our portfolio. We have thought through the cash-flow problem beyond just holding long-dated assets and have a game-plan as to how shorter-dated cash-flow generating assets, like liquid corporate bonds, can form part of the solution.

John Greaves: The Railways Pension Scheme was effectively only formed in 1994 so is still quite immature, even the sections of the scheme that are closed to new members. We are therefore building exposures to assets that lend themselves to CDI, but we are not yet managing them with a specific cash-flow profile in mind. It is very much front of mind though and our thinking there will evolve in the next few years.

PI: Is this the best way to tackle cash-flow negativity?

Jon Exley: CDI is not fundamentally about negative cash-flow. The relevance to CDI is that being cashflow negative is a sign of a more mature scheme that is approaching the end game and is generally better funded. Schemes in that situation can look to lock down the remaining flightpath with a CDI strategy to get more certainty of outcome.

“The market has not yet found anything liquid that can provide excess return and maturity at the same time.”

Julian Halfon, BNP Paribas Asset Management

Julien Halfon: Illiquid credit is not what would be defined as purely cash-flow driven investing; it can be much shorter term, too. SME loans, for example, can be three or four years. They are not matching assets or cash-flow driven assets, but will generate an excess return of sometimes 6%, 7% or 8% above Libor. If you have a larger liability driven investment (LDI) portfolio that has a negative real yield, having something that can balance the returns, diversifies risk and has a duration of three, four or five years is a risk worth taking.

Exley: It is the increased certainty of return over that horizon. You are locking into an asset that through income and redemption will secure that return over the holding period.

John Atkin: Being the asset management arm of an insurer, people come to us and say: “We can’t help but notice that a mature, closed pension scheme which is reasonably well funded looks an awful lot like an annuity book; we’ll have one of those, please.”

You then have to explain that that took decades to build and when it comes to implementation, we haven’t found two schemes whose approach to cash-flow driven investing is the same. Everyone has different starting positions in terms of their sponsor, their liabilities and their funding. So most cash-flow strategies are bespoke.

PI: So what approaches are asset owners taking to build these portfolios?

Ghosh: We have looked at what insurers do and thought about how we can capture those opportunities without having the capital requirement regulations that they face. So, for example, using shorter-dated cash-flows where there is a good risk-return profile and accepting that we take reinvestment risk as we deliver our cash-flow strategy.

Atkin: It is also avoiding the areas that the insurers are playing in. When you have large life insurers dominating the bids for long-dated infrastructure, for instance, the value is not there. Locking into some of those cash-flows for 20 or 30 years at poor value is a mistake you will live with for a long time.

Exley: Schemes using CDI fall into two distinct categories. Some are basically acting like an insurer in looking to build a self-sufficiency portfolio to hold long-term. Then there are schemes that are relatively mature and well funded but cannot afford to buyout yet. In 10 years’ time, pretty much all of their members will be pensioners so they are looking for a strategy to deliver certainty of return over that period to deliver a portfolio value sufficient to achieve buyout.

That is where the shorter-dated higher yielding fixed income assets come in to deliver the required returns in the early years before rolling off as they mature to leave a portfolio of gilts and investment grade fixed income. These schemes are not trying to build a 30-plus year illiquid strategy.

Giles Payne: There are schemes out there that require growth but need to protect those long assets to avoid becoming a forced seller. So you need to be able to predict what your front-end is going to produce so cash-flows are met as they arise. Then the long-end is protected because a lot of people are looking to get additional returns out of illiquids, but you don’t want to be selling them at the wrong point in time.

Halfon: You have long-dated gilts, which may have negative real yields, and you have shorter-dated corporate bonds which give about 150bps on average above gilts. So technically you have either zero or slightly positive real yields.

What is missing is that between the maturities of 10 and 30 years there’s nothing in the corporate world. In some ways, long-dated leases and infrastructure debt meet that deficiency. The market has not yet found anything liquid that can provide excess return and maturity at the same time. So in the search for yield, the long dated excess return box was not filled until people started to realise that they could monetise the illiquidity premium by looking at longer-dated illiquid debt.

PI: What kind of assets are we talking about?

Halfon: The two longest dated assets are technically infrastructure debt and commercial real estate debt, which could be pure debt or leases.

On top of that you could transform shorter dated or floating real estate debt into something longer dated by using the balance sheet capabilities of a financial institution, if you are backed by one.

Kate Mijakowska: Before you dive into what illiquids you should be investing in, focus on why you are doing CDI. Are you worried about investment risk and forced seller risk? What is the endgame objective? Are you going to buyout or not? All those things will ultimately matter for your illiquidity budget, if you have one. So we cannot say that CDI always looks the same. It depends on what the objectives are.

Halfon: You have touched on an important point. For years most people essentially looked at returns, so the return budget was spread between low returning assets like bonds and high returning assets like equities. Then suddenly the risk budget reared its ugly head because it was scary that some assets could lose 40% in one year. Now, as we are dealing with almost completely mature pension funds, the illiquidity budget is another dimension that people have to take into account.

So if you want to optimise your investment strategy – return, risk and liquidity have to be completely embedded into one approach.

Atkin: The purest cash-flow conversations we have are with large schemes that are heading towards self-sufficiency. Their members cannot transfer out once they retire, so those schemes know their cashflows as much as they possibly can, plus or minus actuarial revaluation. So, how would you match those? Then, of course, the waters become muddied by clients asking: “What assets would you put into cashflow portfolios for deferred members?” That then becomes a different conversation from the portfolios built for the retired members.

Ghosh: Asset managers and asset owners have never said that one-size-fits-all in CDI. If anyone is guilty historically of saying that, it’s been consultants who have come out with new product launches time and time again. We should never have lost track of the need to deliver cash-flow, but it got put in the bin when LDI came out.

Exley: LDI is fundamentally about hedging the interest rate element of reinvestment risk. What got lost was that people thought LDI just hedges an actuarial concept of a valuation basis but, in cash-flow terms, it’s all about reinvestment risk.

Mijakowska: LDI has to be part of CDI. I couldn’t imagine a CDI portfolio without an LDI element. LDI is a big pool of collateral and therefore liquidity, so even if the CDI solution is designed in such a way that you end up short of your cash-flow, LDI is a pool of gilts that you can ultimately redeem and therefore satisfy an extra cash-flow. In some ways, it’s helping liquidity as opposed to limiting it.

PI: So CDI has not replaced LDI?

Exley: The two need to be closely integrated because LDI hedges the reinvestment risk of fixed interest assets. The redemption proceeds from these assets are not going to exactly match your liabilities so you are hedging the reinvestment of these proceeds at gilt rates to meet a later liability. LDI also provides a liquidity pool that you can use for day-to-day payments.

Ghosh: You need to look at what LDI is doing to your cash-flows. Our liabilities are the benefit outgo that has to be met in the future. LDI can potentially have a significant impact on your ability to meet it, particularly if what you have to pay significantly exceeds gilt returns, and we are significantly leveraging that investment. That could potentially have a significant negative impact on our ability to meet cash-flow. So you cannot disentangle the impact of LDI in trying to meet the final problem. People forgot that it is about meeting cash-flow. They got swept away with the LDI euphoria.

Atkin: We had been mandated by some large clients to find long dated, fixed, inflation-linked, high quality cash-flows. When we find them we send through the IEO1 and PVO1 ladders of the portfolios and they turn off the swaps. So they are reducing their LDI exposures synthetically via the physicals market.

Ghosh: Our consultants built a model that shows if a large part of your portfolio is dedicated to CDI assets it can negate the case for LDI. Some of their partners are doing exactly the same, using modelling to back it.

Halfon: You run a new risk if you move 100% into CDI. When you become cash-flow negative your only objective is to meet the cash-flow, so you can’t afford a default.

This is why there is an issue. While LDI meets your liquidity requirements by ensuring there’s always something that you can pay your cash-flow from, if you are cash-flow negative and you have a massive amount of CDI on your balance sheet and there is a default…it could be painful. That’s why everybody is saying that you need interaction with the LDI and CDI portfolio to optimise the illiquidity budget.

Kate Mijakowska

Payne: It depends how important within the organisation matching valuations is. I have a number of private company schemes which are not so worried about that, so they have a different set of objectives. They are much more worried about saying: “Right, we have done our calculations with the actuary and we have to produce a 4% return from our assets.” You have a ladder of risk which you can run through your assets, some of which are illiquid, but you do not want to be selling illiquid ones at the wrong time. So there is a different way of looking at this.

Mijakowska: CDI is popular at the moment. The not so well-funded schemes have a challenge in that if they want to invest in low-yielding assets and implement a CDI portfolio it will lock them into an outcome, which means they will not satisfy the ultimate objective of a pension scheme. It is striking a balance between having cash-flow at the front-end, so you are not worried about cash-flow problems, and having enough cash to invest in things that will generate the return to close your funding gap.

Payne: One of my schemes was an early adopter of PFI assets, property, things like that, all of which produce a sensible yield. If you produce layers of those types of assets where you can broadly predict the yield, you need to overlay cash generation on top of that to meet your liabilities. It is not that absolutely everything has to be corporate bonds at the front-end. There are other assets out there generating good cash-flows which are suitable for portfolios. It is just a matter of trying to build a portfolio with a range of these assets which meet your return and cash requirements.

Greaves: There is a spectrum. Good investment strategies are exposed to the widest opportunity set that your expertise and governance budget can handle. So we look at assets like ground rents, lifetime mortgages and long-lease commercial property as sensible assets that we want to build critical mass in because one day they might be suitable for CDI. For now, they are an important part of a diversified portfolio. They provide more certainty of return over a 10 to 20-year horizon and that is attractive.

Atkin: If you want to build as diversified and as good quality a portfolio as you possibly can, then take as long a time to build it; you will be able to carefully pick your entry point. If you tell your in-house team or external manager to only buy what’s good value, then over time you end up with a diversified portfolio of high quality cashflows. If you try to solve it all in one go by building a CDI portfolio in 12 months, you are probably going to be forced towards poor value, in at least some asset classes.

Mijakowska: You can only do that if you are going for self-sufficiency. If you have a five-year plan to buyout, for example, you don’t have that time. Critically, if you are going for buyout you probably wouldn’t be that creative with your asset allocation because insurers are quite fussy over what they want to take. They would love cash and maybe gilts. Halfon: Time is the crucial variable here. If you can be patient, if you can invest for 10, 15 years, you can harvest the illiquidity premium. If you have five years, that is not always going to work. You are going to need to be in very liquid assets which will be acceptable to a buyout firm, which usually means gilts. That is going to require a lot of contribution from the sponsor.

The [CDI] ramp-up period is quite long because a lot of the time you won’t immediately find the right illiquid assets, even if you have a big balance sheet. You will have to do proxies and synthetic CDI assets until you find the right asset, the right infrastructure debt, the right commercial real estate debt.

Giles Payne

Exley: If you have a 10-year horizon to buyout you don’t want to arrive with a lot of these types of assets in your portfolio; you want a portfolio of investment grade credit and gilts. The idea that it’s going to be straightforward to transfer illiquid assets to an insurer at an easily agreed fair value needs some further thought.

Assets that deliver returns over 10 years are attractive for a strategy that’s aiming for buyout in 10 years’ time, but that doesn’t give you 10 years to choose these assets because you really want to be out of them after 10 years. So you have got to get into them fairly quickly.

Again, there are two approaches to CDI. There is a long-term strategy, where you are going for self-sufficiency and so can gradually buy long-dated assets and hold them to maturity. Then there are schemes aiming to buyout that are buying assets to deliver returns over 10 years.

Ghosh: There are £2trn of liabilities but the liabilities that are getting bought out each year are merely a drop in the ocean, so presumably for the majority we are talking about the longer-term horizon. For that majority, the advisory community should be well placed to construct portfolios that will help clients to meet their liabilities through these cash-flow generating solutions. It should be doable – rather than paying hefty insurance premiums to insurers. There is also scope to take advantage of the investment opportunities the insurers can’t actually do themselves.

Exley: It is feasible for large schemes to do that, but there are a lot of mid-sized schemes where it would make sense for them to transfer that to an insurance company because of economies of scale of the insurer. For the multi-billion pound schemes, it will probably be a self-sufficiency solution.

Mijakowska: It depends on their preference. Obviously, we are led by what the client’s objectives are, so this is what we agree at the outset. If a client is going for self-sufficiency then your point is valid, because a pension scheme is not constrained by the same regulatory framework as an insurer and should be able to deliver a better, cheaper solution through self-sufficiency. Some people are going for buyout and if that is the case we also have to design a strategy, which will ultimately give them that.

PI: Are you testing your strategies against different scenarios to account for the impact that transfers can have?

Exley: When you start allocating cash-flows, these 10-year assets are generating your pensions in payments, if your deferreds want transfer values you can take that money out of gilts and some of your more liquid higher yielding credit assets. So transfer values aren’t a problem for CDI, they are actually encouraging schemes to adopt CDI strategies as a holding pattern in their flight path while the transfer value story plays out.

Mijakowska: How you account for transfers is an important and valid question. It is one of many sources of cash-flow that is not related to your usual pension payments. The sterling market’s not big enough so you hold overseas bonds, which you need to hedge. You might also have a collateral call on your LDI. We would advocate solutions where you have too much cash-flow at the front-end to account for transfers out, FX hedging or collateral calls. If that risk doesn’t materialise, then you have too much cash. That’s not a bad problem to have.

Exley: You can link transfer value basis to your assets. So essentially your transfer values are linked to interest rates and you can even link them to credit spreads. So it shouldn’t have any impact on the solution because the transfer values you pay out should be the value of the assets you are holding against that liability.

PI: What problems do investors face when trying to implement synthetic strategies?

Halfon: It comes back to the point that if you don’t have much time you face a lot of competition to acquire illiquid credit assets at ordinary value. If you decide to invest everything now you are going to buy whatever there is, which is not a good idea; spreads will be of bad quality and you are not going to get good assets. If you want to take time to invest into what you need, you have two choices; either you don’t invest and you keep your assets in equities, but you don’t get the exposure to the asset classes that you would like to have.

Or you could structure your CDI portfolio along the lines of what you would like to have, for example, 30% of infrastructure and 40% of real estate debt, by finding the equivalent in the illiquid or synthetic world. You can use listed-corporate bonds. As you go along and the right CDI assets become available, you transfer from listed or synthetic CDI assets into illiquid assets. You are swapping the right exposure in something which is liquid for something which is illiquid, in doing so you are capturing the illiquidity premium.

It is good to have a lot of cash, but it may not be optimal from pure risk, cash-flow matching or liquidity perspectives. So you will have to restructure your portfolio along the line of your CDI in the future by starting to at least get into the right type of assets.

Greaves: If you are buying illiquid assets over time because you can’t get enough exposure to things that offer good risk-adjusted returns, buying liquid proxies might also lock you into poor risk-adjusted returns. You are matching a risk factor you maybe do not care about. The asset allocation choice might not be the motivation for buying those assets. It is important to have as wide a universe as possible when you are building holding portfolios or liquid proxies because essentially you are trying to get a similar risk-adjusted return profile, not necessarily the same asset class exposure.

Halfon: There is an order of priority, a pecking order. If you find the asset you want, invest in it, if not try to find something with a similar risk-return. In the end you will realise that if you can’t find infrastructure debt you have probably no chance of finding good real estate debt. There is a shortage of good illiquid credit. That is why if you start to look from the highest priority to the second or third best you end up with something liquid in most cases. Either you are in cash and get negative yields or you try to find a proxy.

John Greaves

Atkin: That is a fascinating point. If you are seeking good value you should not lock into a similar risk at a poorer price, because you cannot then capture the better value when it arrives. We have found mortgage-backed securities, which being unattractive for Solvency II investors, give an extra premium. The higher quality ones still give you a decent return plus good liquidity, if you are looking to find the sub10 year assets then they are a nice conduit.

We and a few other managers have had an idea to “park” assets in high quality ABS while looking for higher paying, illiquid ones. What you are effectively then running is a “not-finding-the-right-asset” risk rather than an investment at a poor price risk, which is usually a more acceptable risk.

Everyone has different starting positions in terms of their sponsor, their liabilities and their funding

John Atkin, M&G Investments

Ghosh: I would like to go back to an earlier point on this approach being the privilege of bigger schemes. To an extent it has been, but it doesn’t have to be. There is not going to be enough ability to buyout, so there has got to be a realisation that all schemes can’t buyout so they will need this approach. Waiting for value to appear isn’t a natural behaviour by clients who are beholden to investment advisers. It comes back to those bigger schemes that have their own in-house teams.

Halfon: The driver to that limitation to small schemes is also due to when you invest in illiquid debt there is usually a cost of capturing the information, which is pretty high, and usually those projects are not scalable on the low side. A minimum amount would be £15m to £25m for every loan. Even if you put that into a fund structure it is still going to limit access for people who can’t put on the table a £50m ticket to get in. It is not only the fact that you need an in-house team, it’s that the asset class itself does not lend to meeting the requirements of small schemes.

Exley: If a pension scheme arrives in 10 years’ time and doesn’t buyout it would be invested in gilts and matching investment-grade credit. So it is also a solution that could apply as a self-sufficiency strategy, but these schemes wouldn’t necessarily lock themselves into illiquid assets such that if they wanted to buyout in 10 years’ time they would have difficulty transferring those across. The relatively low governance costs of smaller schemes sitting in investment-grade credit and gilts in 10 years’ time would also make this a reasonable solution.

Payne: Looking at an end portfolio of long-dated gilts and credit is aspirational for a lot of schemes. A good number of clients that I work with would not be looking to fund schemes to that degree of certainty. Their definition of self-sufficiency will be quite different to gilts-flat. We have to be realistic about the types of portfolios which a lot of the small schemes are going to be looking to run. They will need to carry running a degree of risk and relying on the sponsor to an extent as well.

Exley: That’s why CDI is not about negative cash-flow. There are lots of schemes that are in negative cash-flow that aren’t running CDI strategies. You have lots of under-funded schemes in negative cash-flow that are going to have to adopt the sort of strategy that you are talking about. CDI, to me, is for relatively well-funded mature schemes that are looking to a strategy of attaining selfsufficiency funding on a relatively conservative basis or buyout in something like 10 years’ time. If we are not careful, we are just going to stray into a general discussion about investment strategy for pension schemes just because all pension schemes are cash-flow negative.

Payne: That doesn’t mean that those schemes aren’t cash-flow aware in the way that they invest and they aren’t aware that they need to have cash in the right place at the right time. Our job is to pay benefits on time to the right people, so cash generation is absolutely important.

We know that when there’s a market shock there is no liquidity, so you don’t want to be relying on selling assets at those times. We need to have assets which are producing cash-flow to pay the benefits at those times. That is just as valid a way of looking to cash-flow driven investing as it is to say: “Right, we have to lock everything down, sit here and let it pay its way out. So as the cost of buyout comes down with the maturity of a scheme, we can then buyout.”

Exley: I agree with you, except when I started in investment 30 years ago the objective of a pension scheme was to meet its cash-flows as they fall due. There is nothing new about the idea of investing to meet cash-flows. What we are talking about is something slightly different for schemes that are in a position now to lock things down by investing in fixed income assets with more certainty of outcome. Payne: Historically people sold assets to produce cash, but there has been a realisation since 2008/09 that we can’t rely on that going forward. There are all sorts of issues, such as sequencing risk, that need to be built into portfolio construction as well. That is cash-flow aware investing.

Mijakowska: It comes back to the original point: what is it that you are trying to do. I don’t like people throwing the CDI term around without defining what the underlying problem is that they are trying to solve. This discussion has shown that people have different priorities. Obviously, the worry that you are trying to address is that to pay cash-flow you may have to sell your equities, which have gone down, say, 40%.

Just defining what the worry is and then trying to solve it as opposed to asking what an ideal CDI solution looks like or talking about it in general terms. There maybe four reasons why people want to do it, and depending on the reason the solution might be a bit different.

Atkin: I prefer the term ‘cash-flow aware investing’ to ‘CDI’. This is a journey, each pension scheme has to make its own journey in its own way and according to its own requirements, “cash-flow” is just slightly shifting the philosophy. There’s no obvious product here which everyone can go into and say: “That’s the solution.” It’s just changing the way people think slightly.

Ghosh: The whole conversation around CDI has created a better mindset in the industry. It has stopped advisers scaring clients witless by saying: “If you don’t do LDI you are toast.” It has also created a better recognition by pension schemes that path dependency will matter at a point in time and when it does you want to be thinking ahead about how you will deal with it. It has changed that philosophy and has got people thinking in a more balanced approach to solving their liability problem. When I refer to liabilities it is the cash-flows; it’s not what a lot of the industry default to in terms of the liability value and calling that the liability.

Atkin: One of the challenges we face as an industry is that for so many years the products that asset managers have brought to market have been about asset management. Of course, everyone has known for many years that it is actually about liability management, it is about cash-flow management and trying to get asset managers to think as liability managers is going to be critical.

PI: With more and more schemes moving into alternative assets is the illiquidity premium disappearing?

Halfon: If you look at the compression of yields for the past 10 years, yes, on average, as spreads over gilts and swaps have compressed, the illiquidity premium has also slightly compressed. But the market has found new areas where they can invest their cash, for example, going from midmarket loans to SME loans or micro credit where there is a demand from companies and there are healthy spread levels.

You had to go down the capital structure and take different types of risk which at the beginning was investment-grade corporate bonds which became illiquids and what was high yield, let’s say, BB or B became CCC or CC.

So down the capital structure and down the liquidity spectrum most of them led to maintaining some level of illiquidity premium. It is an evolving phenomenon.

Greaves: There is a danger in labelling something as having an illiquidity premium just because of its complexity, lack of transparency, execution risk or regulatory risk; it just happens to be illiquid. If there is no good liquid proxy then it is difficult to observe what premium there is for illiquidity. It is important to be aware of what you are buying and understand when we say ‘risk-adjusted return’ what the risks are.

Halfon: Illiquidity is not having ongoing pricing on an established market, but if you look at the way participants in the SME lending market are playing it’s very transparent. It’s a bottom-up approach where you have introducers, auditors, accounting firms and lawyers who deal with those companies on a daily basis and realise they need some financing and make it transparent for lenders to come in and do this in a completely transparent way but it’s not traded, you cannot transact on it every day. The fact that you don’t have a benchmark is a good point. If it is difficult to find one it doesn’t mean that it’s not transparent, it just means that it arrives to the market in a different way than traditional securities.

Greaves: Illiquidity is multi-dimensional. We have talked about some assets that throw off high running yields. A lifetime mortgage book pays 7%, 8%, for example, when you include principal repayment. That is pretty liquid because you are unlikely to need more than that until a scheme is very mature. It is just if you have significant shifts in your strategy or you want to buyout then there could be problems. So it’s important to slice and dice what you mean by illiquidity. It’s not just the ability to realise the entire value within a week or so.

Payne: It’s a desirable asset but it might take six months to get out into market. Yes, that’s illiquid but it’s different from something which won’t at some point be marketable. It’s a different thing.

Ghosh: What we saw as outsize returns when we first started investing are being compressed and have gone to more reasonable value or just below fair value for the risks involved. That said, a lot of pension schemes are referencing the assets that they have purchased versus a gilt discount rate. We frame it as are we happy to take out leverage to buy gilts at negative real yields of 1.7% and stomach this type of long-dated asset where you are not buying it as expensively as you would a gilt.

Chetan Ghosh

PI: So origination is important when looking for someone to manage a portfolio of cash-flow generating assets?

Halfon: It is more complicated than the traditional sourcing of assets. The process to access SME loans, for example, requires a large infrastructure, partners, introducers, a network of people working with you. To do this efficiently in Europe you probably need 200 to 300 people. This is only for one asset class. In mid-market US loans, we have had an entire investment banking division working on this for three decades. So this is not as straightforward to source the right assets as a lot of other asset classes.

Exley: A lot of value is added in the origination and then after that it is looking after the asset and making sure that it continues to perform. The origination platform needs to be well resourced to actually find the assets and the fees charged need to reflect this.

Ghosh: There is a scarcity of these assets, especially at the price we want to pay. We stay close to the asset managers to make sure we are at the top of their list when their queue for longlease properties goes to zero. We are doing a lot of relationship networking to stay close to them for when a new supply of cash-flow-generating assets comes to market.

CDI is not fundamentally about negative cash-flow.

Jon Exley, Schroders

Greaves: Co-investment relationships can be quite important. In terms of being the first person a bank or asset manager calls, the key is the strength of the relationship and governance processes. Can you make quick decisions on complicated investments? Being a nimble and flexible investor can be a real advantage in this space.

Atkin: You have got to be able to do six to nine months work on a deal and then walk away from it if you can’t find value. So finding a partner that you trust in the asset management space is very important.

Mijakowska: It feels like there are more and more funds cropping up that invest in illiquids. They try to take the governance burden off the smaller schemes by deciding what the most attractive things to be in are. That is getting some traction.

Payne: If we go back 10 years we were looking at very narrow, distinct portfolios that investment consultants were pushing people towards. Now it’s much healthier. Certainly the way that the schemes I work with are to give portfolio managers a wide brief and an objective, as opposed to saying: “I want you to invest in that asset class. Can you go into that area of the market and achieve this return?” Managers will do a much better job if you don’t tie their hands.

Greaves: The challenge is then measuring success, isn’t it?

Payne: Absolutely.

Roundtable attendees:

John Atkin, Director of fixed income, M&G Investments

John joined M&G Investments in 2008, as a Director of Fixed Income. His primary focus is on developing our institutional fixed income business in the UK with Consultants and Pension Funds.

Prior to joining M&G, John was a Director of Consultant Relations with Scottish Widows Investment Partnership where he was responsible for the company’s relationship with a number of leading investment consultancy firms.

Joining the industry in 1991, John has also worked with Baring Asset Management – covering their Scandinavian markets, with Framlington Investment Management and with Old Mutual Investment Group.

Chetan Ghosh, Chief Investment Officer, Centrica

Chetan is the Chief Investment Officer for Centrica’s pension scheme arrangements within a Common Investment Fund and has held an in-house role for the last 9 years. He is responsible for providing support to the Directors of the Investment Committee. His role covers investment strategy considerations, asset class and manager research, and the liaison with the investment advisers.

He has 23 years industry experience, primarily from the consultancy side, where he spent 5 years as a pensions actuary and 10 years on the investment side, a large part of which was at Hewitt. Immediately prior to joining Centrica, he developed the Fiduciary Management offering at an asset manager where he was able to gain valuable experience on improving investment decision making governance structures.

John Greaves, Head of investment strategy, RPMI Railpen

John is responsible for scheme strategy, bringing together stakeholders to translate client investment needs into actionable strategy through our client asset allocation framework and the design and specification of our pooled fund range. The team also works closely with our Public Markets, Private Markets and Real Assets teams, helping to evaluate potential new investment ideas, researching asset class strategy and providing ongoing support for macroeconomic and market research.

Before joining in 2012, John previously held a number of roles in private wealth management across equity research, fund research and strategy. He is a CFA charterholder and holds the Chartered Institute for Securities & Investment Diploma and a Master’s Degree in Aeronautical Engineering.

Kate Mijakowska, Senior vice president, manager research, Redington

Kate Mijakowska joined the team in 2011. Since then she has researched managers across several asset classes. In her current role, Kate is an LDI and end game solutions specialist, advising on hedging mandates with total aggregate exposure of £95bn. She has experience working with DB pension schemes ranging in size between £100m and £30bn in liabilities. Kate is responsible for manager selection, product evaluation, mandate implementation, as well as assessing the impact of relevant regulatory changes.

Julian Halfon, Head of pension solutions, BNP Paribas Asset Management

Julien is Head of Pension Solutions at BNP Paribas AM having joined in April 2018 from Mercer where he spent 6-years as Principal. Prior to that Julien worked for Goldman Sachs, Aon, P-Solve and Lazard. With investment banking and consulting experience stretching over 26-years Julien has spent over 15-years advising institutional clients on structuring and implementing pensions and insurance solutions for national and cross-border clients.

Giles Payne, Professional trustee, Capital Cranfield

Giles, who joined Capital Cranfield in 2018, has more than 30 years’ experience in the pensions industry and has worked for consultancies, an insurance company and an asset manager.

He is an experienced professional trustee who works with defined benefit, defined contribution schemes, Master Trusts and sits on an Independent Governance Committee. He acts as chair to a number of schemes as well as investment sub-committees.

In addition to his extensive investment expertise, Giles’ experience includes funding negotiations, sectionalised schemes, Pensions Regulator investigations, Flexible Apportionment Arrangements, parent company guarantees, contingent assets and exit management.

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