By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Just got an email with the above title. I was intrigued, as I suspect that you might be, too. It was for an upcoming webinar that was being conducted by a mega investment shop. The webinar will focus on a few primary points, including the attractive valuations of the risk factor Quality and non-US investments, pro- and counter-cyclical exposures, and a deep dive into a potential recession with a discussion as to the depth and duration of such an event. All of this leading eventually to a discussion on how to position your portfolio to “Generate Income and Minimize Risk!”

Boy, that all sounds nice, but how much will the performance needle be moved by adopting some or all of these investment ideas? Each one of these ideas comes with an annual standard deviation that in some cases is quite volatile (non-US investing). Are these long-term sustainable ideas or dynamic opportunities that must be acted on quickly in order to maximize the potential reward? Do US pension plans have the ability to move substantial assets around in an attempt to add incremental gains after transaction costs? I don’t believe that they do.

In addition, we know that “value” is in the eye of the beholder. We are witnessing that right now. What looks like an over-valued situation (mega-tech) may continue to see incredible momentum pushing share prices higher and higher despite valuations that are stretched. According to the folks at Glen Eagle Trading, Technology and other growth stocks without dividends have risen by 10% this year, while stocks with high dividend yields have decreased by 6%. Think valuation matters in this example?

Risk is best measured and defined as the uncertainty of achieving the objective. For DB pensions, the true objective is funding liabilities in a cost-efficient manner with prudent risk. As a result, pension risk is best defined and measured as the asset growth deviation from liability growth. This is best measured by a Custom Liability Index (CLI). Pensions should be all about cash flows. As a result, you want asset cash flows to match or exceed liability cash flows.

If you truly want to get off the asset allocation roller coaster, while pursuing a strategy that generates income and minimizes risk, convert your current core return-seeking fixed income into a cash flow matching portfolio that defeases pension liabilities through the cash flows created by interest and principal upon maturity. Your “savings” are locked-in on day one. Importantly, interest rate risk is eliminated as future values (benefit payments) are not interest rate sensitive, while “buying time” for those value stocks to finally become appreciated by the marketplace.