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

In a recent article in Nakedcapitalism.com, titled “Private Equity Becomes Roach Motel as Public Pension Funds and Other Investors Borrow as Funds Remain Tied Up”, posted by Yves Smith, there was a reference to the Stone Ages. Smith wrote, “pension funds in particular have actuarially-estimated payout schedules to meet. In the stone ages, they used to buy bonds and match the maturity to expected obligations”.

In the stone ages that strategy of matching maturities was likely used (a laddered bond portfolio). Today, we have highly structured optimization models that can do a far more effective job of ensuring that the cash flow to meet benefit payments is available when needed (monthly) at low-cost and with prudent risk.

Given the elevated yields available to bond investors, why wouldn’t we want to once again explore a strategy that actually supports the primary objective in managing a DB pension which is to SECURE the promised benefits at low cost and with prudent risk? It doesn’t seem like the current approach is working any better. It seems as if the “norm” in asset allocation results in less transparency, higher costs, and little liquidity. That doesn’t seem like a winning formula, but what do I know?