In Redington’s Destination Endgame paper, we introduced the concept of Cashflow Driven Investing (CDI). CDI is a highly intuitive approach to investing that is based on the premise of using high quality bonds (corporate and government) to match the cashflows of a pension scheme to avoid having to sell assets to meet cashflows, becoming less concerned with the mark-to-market change in prices of your portfolio and reducing re-investment risk.
Destination Endgame went on to explain that whilst it is intuitively sensible, CDI may not always be the most attractive option. In fact, the importance of affordability – are you well funded enough to achieve target returns just with high quality debt? – and efficiency compared to alternatives – how attractive are returns from high quality bonds? – are key to deciding whether CDI is appropriate for your scheme in current market conditions.
In this article we explore further some of the benefits and limitations of CDI as well as some of the detail around implementation.
Click to read CDI: Does It Match Up For You?