It is common in our pension industry to fit every product/strategy into an asset class box. I understand the thought process, but it doesn’t work for ALM strategies, especially when discussing products that are designed to meet a client’s specific pension liabilities. As a reminder, no two liability cash flows are the same given different labor forces, salaries, mortality, and plan assumptions. This requires that every ALM mandate be tailored to meet the specific requirements of that fund. Thus, these unique ALM fixed income solutions can’t and shouldn’t be compared to a generic fixed income index. Such generic benchmarks are inappropriate objectives and are not a good fit.
In order to assist the asset consulting community and their clients, we at Ryan ALM created a Custom Liability Index ((CLI) trademarked in 1991) to provide the appropriate index for cash flow matching assignments (CDI) and any LDI strategy. When asked to provide CDI, we are usually asked to defease roughly 10-years of the Retired Lives Liabilities, but in several cases our mandates are for periods both shorter and longer. How would comparing these assignments inform anyone of our skill relative to say the long corporate index? Clearly, it wouldn’t. However, the Ryan ALM CLI produces the information absolutely necessary to determine if our fixed income skills were in place to match and fund each benefit and expense during the period that we are asked to cover. All that matters in these mandates is that we have secured and fully funded benefits at low cost, and with prudent risk.
If a pension plan were to hire a small cap core manager with the goal to beat the R2000 then placing that manager in a small cap box might make sense because they aren’t providing a unique solution since the objective is the same for 100s of managers. But asking a fixed income manager to create a cash flow matching strategy designed to fully fund a plan’s specific liabilities is as unique a solution as there is. Don’t try to put CDI or any custom LDI in an asset class box. The true value added and acid test of any CDI asset manager is the cost savings to defease the liabilities that have been targeted. It doesn’t matter how they perform versus the long corporate index or any other generic fixed income comparison. To help consultants and plan sponsors with return performance, Ryan ALM provides a CLI that calculates the growth rate (return) of liabilities and a Performance Attribution Report (PAR) that calculates 14 different risk/reward measurements of assets versus liabilities.