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:
For synthetic and listed CDI asset solutions, portfolio construction guidelines are similar to those of a real CDI asset portfolio:
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.
|Long term return||3.35%|
|Excess over cash||1.7%|
|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:
The limitations of such an approach reside in: