An alternative to real CDI assets can be found in synthetic and listed CDI assets. These can prove very useful in the event that sourcing real CDI assets proves challenging, expensive or both due to lack of market supply and / or large investment sizes.

The objectives and constraints of a synthetic and listed CDI solution are usually to:

  • Replicate the exposures and cashflow matching features of a real CDI asset portfolio;
  • Offer a (temporary) implementation alternative to real CDI asset investors as these are not always available at acceptable conditions; and
  • Maintain a high level of liquidity to ease transition to real CDI assets when available.

For synthetic and listed CDI asset solutions, portfolio construction guidelines are similar to those of a real CDI asset portfolio:

  • replicate the cdi portfolio solution;
  • identify the most appropriate synthetic and listed cdi asset classes to achieve the require replication;
  • maintain the appropriate level of liquidity in relation to a potential transition to real cdi assets; and
  • maintain an attractive risk / return trade off at portfolio level

The resultant synthetic and listed CDI asset portfolio is also diversified and offers valuable expected return and cashflow matching features.

The synthetic CDI asset portfolio metrics are summarised here. The objective being to maintain similar metrics for comparison with the real CDI asset solution.

Case study one:


Synthetic CDI Asset Portfolio (Illustration):
ABS 25%
Infrastructure 20%
Real assets 5%
Real estate 25%
Utilities 25%
Portfolio metrics:
Long term return 3.35%
Excess over cash 1.7%
Risk 5.1%
Sharp 0.6
Coverage CDI first 10 years Liabilities 60.0%
Weighted average life CDI assets 5.5%

As can be seen here, the synthetic CDI portfolio can be structured to maintain some cashflow matching properties. Although this may not be extended easily beyond 10 years at this stage, further extensions can be considered ongoing.

Having the flexibility to use synthetic replication provides pension schemes with optionality in the speed and rate of deployment into real CDI asset classes.

This patient capital approach reduces opportunity cost for clients and ensures that illiquid assets are only deployed when their relative value suggests that it will enhance the CDI portfolio:

  • A strong monitoring framework is therefore necessary to continuously govern the relative value between synthetic and real CDI assets and optimise the implementation of the CDI solution.

The limitations of such an approach reside in:

  • The limited supply of synthetic alternatives beyond 10 years and in the mark-to-market risks of potentially volatile listed securities and derivative instruments. However, as can be seen in the graph above, a high matching level can still be achieved with a smaller cashflow
  • There is potential reduced yield generated from synthetic and listed CDI asset portfolios