Don’t Be A Forced Seller

A terrific article appears In the May 18th issue of P&I, titled, “After extinguishing fires, asset owners turning to liquidity”. The article cites examples from many large overseas plans on how they are handling or preparing for greater cash needs as the Covid-19 pandemic carries on.

Not surprisingly, as this happens in every market crisis, investor’s income has declined as companies have cut or eliminated dividends ($26 billion as of 4/28 according to a Barron’s article), private distributions have trailed off, and interest rates have plummeted. Investor needs for liquidity go beyond pension benefit payments, as investors deal with settle losses from hedging activities, fund margin calls, and meet capital calls from their private market portfolios.

Public funds have dramatically increased their exposure to the alternatives area during the bull market run following the GFC. As a result, exposure to “liquid” assets available to meet these cash needs has fallen. Regrettably, trying to create liquidity often means being a forced seller. Plans can avoid this unfortunate occurrence by restructuring their portfolios into two buckets. First, transform the current fixed income exposure into a cash flow driven investing (CDI) approach to meet both near-term benefits and expenses. We refer to this allocation as the beta bucket. According to the P&I article, many of these mega plans still had significant exposure to traditional fixed income instruments that contain lots of interest-rate risk.

Second, create an alpha bucket with the goal to meet future liability growth. This allocation should contain all non-bond instruments. Because the beta bucket provides all of the necessary liquidity, the alpha bucket can invest with a much longer time horizon and in instruments that no longer have to provide liquidity.

We witnessed back in 2008 and 2009 many E&Fs that were forced to sell assets into weakness, which exacerbated the decline in the value of those instruments. Unfortunately, history has once again repeated itself. By adopting the Ryan ALM CDI strategy, pension systems of all types, can insulate their plans from the damaging impact of being a forced seller. Lock in benefit and expenses for the next 10 years and allow your alpha assets to grow unabated.

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