Cash flow-driven investing has taken off in the U.K. defined benefit market as the pension funds continue to mature, said data analytics and market intelligence firm Spence Johnson.
In its latest “Institutional Money in Motion” report, which tracks flows and trends in the Europe, Middle East and Africa institutional markets, Spence Johnson found an increased focus on having available cash to make payments to retirees. It is also a key focus for the money management firms investing on their behalf, said the report.
The firm said evidence for this trend comes from inflows into private loans, developed market credit and infrastructure, although other investment approaches also fit the bill.
Spence Johnson said the most commonly used asset classes for cash flow-driven investing by U.K. DB funds were buy-and-maintain credit, private or alternative credit, multiasset credit and real estate – in particular long-lease real estate.
Less commonly used are multiasset income and equity income strategies. “Some managers have argued that although less secure, equity income funds can offer value within a cash flow approach,” said the report.
The firm estimated a total of €20.9 trillion ($22.2 trillion) of institutional assets across Europe, the Middle East and Africa, of which €7.25 trillion are managed by money managers. The largest pools of assets available to managers come from Dutch and U.K. pension funds and Middle East-based sovereign wealth funds, the report said. Of these assets, the U.K. is the most accessible opportunity for money management firms, with 60% of the €4.3 trillion market outsourced.
The firm said institutional investors continue to invest in multiasset and liability-driven investment strategies, while U.K. and German investors have been allocating to alternatives. Active equity, aggregate fixed-income and absolute-return strategies were shunned by Middle East and African investors.