P&I just posted their performance study by Morningstar. As usual, it shows little or no value in ACTIVE bond management over most time frames. Moreover, given today’s low yields the question is: What is the value in bonds if one is striving to achieve the ROA?
Answer: CASH FLOW
Bonds are the only asset class with a known future cash flow and future value. That is why bonds have been picked as the choice for defeasement, dedication, immunization, and LDI strategies.
Instead of maintaining your current active fixed income program convert it to a Liability Beta Portfolio (LBP). The LBP model is a cash flow matched model that provides the matching of liabilities at low cost and importantly, low risk. Versus ASC 715 discount rates (AA corporate securities) funding costs are reduced by 8% to 12%. At a fee of only 10 bps, the LBP would be a proper replacement of active bond management, which has a 25 bps to 30 bps average fee. Given a 20% allocation to bonds, inclusive of contributions, the LBP model could possibly fund the next 7-10 years of liabilities with no change to the plan’s current asset allocation.
The true question is: Why have active bond management when you can de-risk the plan gradually with a LBP model that will reduce the cost of funding liabilities, while also reducing significantly fixed income fees?
Please don’t hesitate to reach out to Ryan ALM and KCS to discuss this concept in more detail.
Our regular readers have likely been wondering where we’ve been this month, as the KCS blog has been quiet. I can assure you that it wasn’t because we spent the entire month on a beach in Florida. We were given the opportunity to speak / present at four conferences during the month, including;
- November 9, Financial Research Associates, Manager Selection, Due Diligence, and Oversight – Princeton Club, NYC – “The Economy: What Impact Is It Having On Your Manager Selection?”
- November 17, Opal’s Endowment and Foundation Forum, Boston, MA – “A one and five year strategic investment and planning mechanism for small and mid sized foundations”
- IMI’s 32nd Annual Consultants Congress, Cornell Club, NYC – “Standing Out In A Crowded Marketplace”
- Association of Business Administrators, NY, NY – “Benefit of Knowing Your Liabilities”
We were honored to be asked to present our views at these important forums, and we would be pleased to speak with you on any of these topics should you have any questions. Presentation material is available for some of these as well.
We are pleased to provide you with the latest edition of the KCS Fireside Chat series. In this article, Dave Murray, KCS’s DC Practice Leader updates you on some important DC information as you head into 2016. Hopefully, his insights will help guide you through the balance of this year and into next.
As you know, KCS is a big fan of defined benefit plans for a lot of reasons, but primarily because DC plans (401(k), 403(b) and 457s) were not designed as retirement accounts, and because of loan features act like glorified savings plans. It is good to see that disclosure is being tightened around one’s ability to take hardship loans. We realize that emergencies present themselves, but borrowing from a DC account should be the absolute last resort.