We, at Ryan ALM, are proud to share with you Ron Ryan’s chapter on Cash Flow Matching, also known as cash flow driven investing (CDI), that will appear in Dr. Frank Fabozzi’s latest edition of the “Handbook of Fixed Income Securities“. This is quite an honor and recognizes Ron, and the Ryan ALM team, as one of the true experts on this subject. Fabozzi’s Handbook is usually required reading for the CFA degree, university Finance courses, as well as a valuable reference for many fixed income practitioners.
Importantly, this work highlights the differences between cash flow matching and duration matching, which has been the preferred pension de-risking strategy in the U.S., while CDI is the preferred method among plan sponsors in Europe. We would encourage you to take a look. One of my favorite sections is the “seven flaws of duration” in the CDI versus LDI section. I think that you’ll find Ron’s thought on this subject to be incredibly insightful.
As we’ve recently witnessed, once again, stock and bond market performance can dramatically impair even the best funded pension systems when the unexpected presents itself. Adopting a cash flow driven approach helps Pension America protect critically important plans in the short- to near-term, while the growth (alpha) assets enjoy an extended investing horizon to overcome recent weakness without becoming a source of liquidity. We would certainly welcome an opportunity to respond to any questions that you have regarding this subject.