Sponsors could look to CDI portfolios constructed with the intention of providing cash flow from coupons, maturities and pay-downs over each period immediately prior to a required outflow. The breadth of fixed-income offerings across the curve broadens the universe of investment opportunities that might provide needed cash flows while maintaining portfolio diversification. With this multisector approach, plans gain the potential to generate additional yield over the standard private pension discount curve, which references AA corporate bonds. The potential additional yield is sought through investments in investment-grade corporate bonds, structured finance, high-yield corporates and emerging markets debt.
Investors looking for enhanced yields might want to consider a CDI portfolio with higher allocations to high-yield corporate and emerging markets debt, and to also include allocations to bank loans and distressed debt. The opportunity for enhanced yields with this approach means the risks are higher, given lower liquidity, higher cash-flow uncertainty and increased credit risk. These risks must be considered during the portfolio construction phase with the goal of reducing the potential that asset cash flows fall short of plan outflows.
Exhibits 1 and 2 provide examples of two hypothetical CDI portfolio allocations — a traditional CDI portfolio and an enhanced-yield CDI portfolio — to demonstrate the range of fixed-income sectors that can be used to support plan cash-flow needs.