During the last decade or so, the rage within fixed income investing has been for plan sponsors to seek or investment managers to offer Core Plus fixed income capability. The investment thesis put forward is that a fixed income manager with multiple capabilities can enhance the risk / reward behavior of a single core capability. The enhancements may be in the form of exposure to such instruments as high yield, international / emerging debt, bank loans, secured debt, etc. One of the thoughts supporting this concept is that managers should be able to do a better job, on average, than committees in timing exposures and implementing asset shifts. We agree that by providing a manager with greater investment freedom and breadth the investment process should see an improvement in its risk / return characteristics.
Given the troubles that continue to plague traditional defined benefit plans, especially as it relates to funding them, we, at KCS, feel that this idea should be expanded to other aspects of pension management, including asset consulting. It seems to us that the asset consulting industry needs to rethink its approach from one focused exclusively on the asset side of the equation to one that rightly focuses on the plan’s liabilities, too.
We’ve written numerous times on the benefits of measuring a plan’s liabilities through the creation of a custom liability index. Importantly, the output from this exercise helps one better understand their plan’s liability growth rate, term structure and interest rate sensitivity. Without this insight, how does one allocate assets? Since every plan’s liabilities are unique, it doesn’t make sense that a generic 8% return (ROA) target could adequately and effectively guide one’s asset allocation.
The seven senior members of KCS’s team have well over 200 years of combined, relevant investment experience. In addition, our senior talent have worked with and consulted to many of our industry’s largest plan sponsors. We understand the asset side of the equation as well as any other firm, while also understanding its limitations, especially in the short-term. Importantly, with KCS you get the PLUS. We are unique in our ability to measure and monitor liabilities, and to use the output to drive asset allocation and our risk-reducing glide path toward full funding.
Why settle for just asset consulting when you can have Consulting PLUS through a firm that knows both ASSETS and LIABILITIES! If providing greater breadth in fixed income enhances the risk / reward characteristics just wait until you see how adding liability insights enhances your traditional consulting relationship.